The prospective rise in processing and consequent draw down in crude inventories in the second and especially third quarters is what has been boosting futures prices and causing calendar spreads to tighten.
The oil market’s rapid evolution from a massive production surplus last year to deficit has been most evident in the United States, where reliable data on stocks is published weekly by the Energy Information Administration (EIA).
U.S. inventories of crude and products outside the strategic petroleum reserve amounted to 1,283 million barrels on March 5, which was just 12 million barrels or 1% above the previous five-year average.
Crude stocks were 29 million barrels or 6% above the five-year average, mostly as result of the disruption to refineries caused by cold weather and power failures in Texas last month.
But inventories of finished fuels and intermediate refinery products had already fallen to 15 million barrels or 2% below the average for 2016-2020.
The gasoline shortfall has become particularly severe, with inventories 15 million barrels or 6% below the five-year average.
Total stocks of crude and products have fallen by 168 million barrels since July, largely reversing the 198 million build between March and June associated with the epidemic and volume war between Saudi Arabia and Russia.
In the next few months, U.S. refineries will have to accelerate crude processing and fuel production to prevent stocks from depleting further.
If coronavirus controls on travel, services and international passenger aviation are relaxed, that would provide an even bigger boost to consumption.
But it is important to stress that crude processing will have to accelerate even if controls are maintained to prevent fuel stocks from eroding to undesirably low levels.
The depletion of petroleum inventories is most obvious in the United States because of its high-frequency real-time data, but the phenomenon is worldwide.
Commercial petroleum inventories in the OECD countries have fallen by around 284 million barrels since July, reversing most of the 335 million barrel build between last February and June, according to the EIA.
In March, OECD inventories are likely to fall slightly below the average for the previous five years, for the first time since the epidemic started to spread outside China in February last year.
Globally, petroleum consumption has been above production in eight out of the last nine months, according to EIA estimates (“Short-term energy outlook”, EIA, March 9).
OPEC+ leaders have expressed scepticism about the continued recovery in oil demand in the near term, opting to leave production unchanged at their meeting on March 4, rather than increasing it.
But even if consumption remains at current levels, global inventories will continue to tighten over the next six months, and any relaxation in coronavirus movement controls will intensify the drawdown.
Futures prices are anticipating global inventories will become tight over the second and third quarters and signalling the immediate need for more production, either from OPEC+ or the U.S. shale industry.