Despite the surge in coronavirus cases in recent weeks, crude oil demand in the United States could be on track to increase in the coming months as inventories have been steadily declining since their peak levels in the summer. Total U.S. stocks of gasoline and diesel are still trending above their five-year averages, but the oversupply has considerably shrunk since June-July when inventories had built at a fast pace due to the lockdowns in the first COVID-19 wave.
U.S. refiners have managed to reduce the glut in diesel stocks, which weighed heavily on the market three months ago. Refiners have maximized the production of light distillates such as gasoline at the expense of middle distillates such as diesel while curbing overall crude oil processing rates since April.
Now refiners may have to boost crude oil inputs over the coming months and produce more middle distillates than they did over the past months, to prevent diesel inventories from drawing down too much, Reuters market analyst John Kemp writes in a recent column.
While the oil market and analysts were focused in the past two months on the resurgence of coronavirus cases across major economies and record-high daily tallies of infections in the United States, refiners in the U.S. were processing reduced volumes of crude oil and were prioritizing the production of gasoline over the output of diesel and jet fuel, where demand has been weaker.
As a result, the glut of distillate fuels in the U.S. commercial inventories has been slashed considerably, although stocks are still above the latest five-year average for this time of the year.
For example, five months ago, at the end of June, distillate fuel inventories were about 28 percent above the five-year average for that time of year, according to the weekly petroleum status report of the EIA for the week to June 26. Production of gasoline was rising week over week while production of distillate fuels was dropping.
By the end of November, distillate fuel production was roughly the same as in June, but inventories of distillates were already recording draws for weeks in a row. U.S. distillate fuel inventories decreased by 1.4 million barrels in the week to November 20. They were already reduced to around 8 percent above the five-year average for this time of year, compared to 28 percent above the five-year average for the last week of June, EIA data shows.
Just two months ago, distillate fuel inventories across the United States were around 23 percent above the five-year average for the time of year, EIA’s weekly report for the week to October 2 showed. Distillate fuel stocks dropped from 171.8 million barrels in early October to 142.6 million barrels for the week to November 20.
Although distillate fuel inventories are still above seasonal averages of the past five years, the trend in downsizing the huge glut from early summer has been clear.
The reduction in oversupply in U.S. distillate fuel inventories gives the oil market hopes that refiners could begin to boost crude processing for diesel early next year.
On another bullish note, crude oil inventories at Cushing, Oklahoma, fell in the week to November 20, after an uncomfortable for the market increase to 61.6 million barrels in the week to November 13.
In the week to November 20, commercial crude stocks at the Cushing hub dropped to below 60 million barrels—at 59.9 million barrels.
“Cushing crude oil inventories fell by 1.72MMbbls over the week, and given that we have also seen the WTI timespreads tighten over the last month, it’s likely that we continue to see a drawdown of Cushing inventories moving ahead,” ING strategists Warren Patterson and Wenyu Yao said last week, commenting on the latest EIA report.
U.S. inventories of crude oil and fuels are still above the five-year average trends. Yet, if the steady decline in distillate inventories continues, refiners could give the oil market a boost by increasing crude oil processing rates in the coming months.