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Oil situation and lost year for Saudi Arabia











Crude oil prices are begging to rebound after a sharp drop in March and April that saw the US WTI benchmark trade into negative territory. This was the first time in history that WTI traded below zero, which reflected the high cost of storage and the harsh reality that there was nowhere to put the oil. The rebound in prices is due to several factors. First, Saudi Arabia, OPEC+ which includes Russia and the United States have all cut oil production.

Also, it appears that countries around the globe are now in the process of re-opening their economies which couldput upward pressure on demand. While the drop in production from OPEC+ and the United States has helped limited further declines in the price of oil, prices will not be able to fully rebound until demand fully comes back or, US companies are forced out of business further reducing US production.

Declined in Gasoline Demand are Offset by Lighter Runs

Gasoline demand is down substantially. According to the US Energy Department, US gasoline demand is down nearly 40% year over year. Despite this dramatic decline, this number is slightly higher than it was 2-weeks ago. To offset the harsh drop in US gasoline demand, US refiners have eased production. To make gasoline a refiner needs to distill the crude oil. Refiners will not go through this process unless they can make money on gasoline, diesel, and jet fuel. As of the first week of May, U.S. crude oil refinery inputs averaged 13.0 million barrels per day. Refineries are operating at 70.5% of their operable capacity in May of 2020 compared to 91% of operable capacity in 2019. Gasoline production decreased last week, averaging 6.7 million barrels per day, compared to 10-million barrels a day in 2019.

The US Has Grabbed Market Share

One of the issues that created an issue with oil supply that pushed Saudi Arabia into an oil war with Russia was the rising production in the United States. Saudi Arabia along with the rest of OPEC was willing to cut production as COVID-19 began to spread around the globe. Russia was quick to point out that while OPEC+ was cutting production, US E&P companies were continuing to produce at maximum rates. The US had increased production by more than 1-million barrels a day, to 13.1-million barrels a day even as the coronavirus pandemic ensued. Despite their objections, Russia finally came to the table, but without and assurances that the US would cut output. The US has still not agreed to an official output cut, but production has declined by 1.2-million barrels a day from the previous highs down to 11.9-million barrels a day. US production is down 0.3-million barrels a day compared to the same time last year.

The Bottom Line

The upshot is that the huge loss in demand is a lost year for oil producers. While consumers will likely get back on the road in the next few months and stimulate gasoline demand it’s hard to see the airline industry reviving soon. Warren Buffet is very pessimistic about the airlines and told investors in early May that he had dumped all his airline shares. US Jet fuel demand is down approximately 65% year over year, while will be hard to make up. While OPEC+ has substantially reduced production, the US market share should continue to fall. The US oil rig count has fallen to the 2016 lows. The last time the rig count was at this level, the US was producing less than 9-million barrels a day. If there isa further decline in US production due to companies going out of business, this lost year for Saudi Arabia might be worth it.

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