Petroleum product demand returns faster than supply, drawing inventories and supporting prices
The prices of crude oil and petroleum products have increased from the lows seen in 2020 and are near their highest levels since 2014. As a result of the COVID-19 pandemic, demand for crude oil and petroleum products declined rapidly, inventories increased, and prices fell. This year, demand, both in the United States and globally, returned to 2019 levels faster than supply, reducing inventories and raising prices for crude oil and petroleum products. Crude oil, gasoline, and distillate prices were all higher on October 26, 2021, than they have been since February 2020, before the World Health Organization declared COVID-19 a pandemic.
The decrease in demand for petroleum products due to the pandemic led to a significant increase in crude oil inventories and falling crude oil prices starting in early 2020 (Figure 1). U.S. crude oil inventories reached 532.7 million barrels in June 2020 but fell to 448.0 million barrels in June 2021, the first time since the pandemic began that U.S. crude oil inventories were below their February 2020 level. This decline in inventory indicates that the large crude oil builds that occurred in the first half of 2020 have been completely withdrawn. Crude oil inventories have continued to decline since June 2021, reaching 430.8 million barrels as of October 22, a 17.1 million barrel (4%) decrease from June. Just as large inventory builds contributed to low crude oil prices in 2020, the large inventory withdrawals in 2021 have contributed to high crude oil prices. The price for U.S. benchmark West Texas Intermediate (WTI) crude oil reached $85 per barrel (b) on October 26, up $37/b since the beginning of the year. Likewise, European benchmark Brent rose $35/b over the same period, reaching $86/b on October 26. These prices surpassed their pre-COVID pandemic, February 2020 average prices by $34/b and $31/b, respectively.
Refinery runs have increased faster than crude oil production in the United States, resulting in declining U.S. crude oil inventories. Despite several refinery closures since 2020, U.S. gross refinery inputs have nearly returned to their 2019 level for this time of year. The latest available weekly data indicate that the four-week rolling average for gross inputs into U.S. refineries was 15.7 million barrels per day (b/d) the week of October 22, a 2% decrease from the same week in October 2019.
In contrast, U.S. crude oil production has grown more slowly. U.S. crude oil production, which averaged 12.8 million b/d in February 2020, fell to 9.7 million b/d in May 2020. Although U.S. crude oil production has since increased from that low point, it has remained at about 11.0 million b/d since January 2021, due in part to significant disruptions from cold weather in February and from Hurricane Ida in September. We estimate that U.S. crude oil production averaged 11.3 million b/d the week of October 22, a 12% decrease from U.S. production in February 2020.
Production cuts among OPEC member countries and others have contributed to slow growth in the production of crude oil and other liquids outside of the United States. Over the first six months of 2021, OPEC crude oil production averaged nearly 10% less than in February 2020. In July, OPEC+ announced that it would increase production by 400,000 b/d beginning in August. As a result, we estimate that OPEC production averaged 27.2 million b/d in September 2021, which is 3% less than production in February 2020. Despite the increased production, we estimate in the October Short-Term Energy Outlook that global petroleum stock draws averaged 1.9 million b/d in the third quarter of 2021, which is more than the 2016–2020 average draw for the third quarter of 1.0 million b/d.
Due to slower growth in U.S. and global crude oil production, market participants have been drawing inventories to meet fast-growing petroleum product demand, particularly for gasoline and diesel. Based on a rolling four-week average of product supplied data, U.S. gasoline demand fell to 5.3 million b/d the week of April 24, 2020, a 44% decrease from the 2019 level for the same week. Gasoline demand has been within 3% of 2019 levels since July 2021; however, U.S. gasoline demand for the week of October 22, 2021, averaged 9.4 million b/d, only 2% below the 2019 average for the same week. Distillate demand has returned even more quickly. From August 13 to October 15, distillate demand has been above 2019 levels (Figure 2). For the week ending October 22, U.S. distillate demand averaged 4.1 million b/d, 2% less than the same week in 2019. Although jet fuel demand remains 19% lower than 2019 levels, it is higher than in early 2021, when demand was about 30% to 40% lower than in 2019.
The relatively high petroleum product demand is contributing to product inventory draws and increasing prices and crack spreads. U.S. gasoline inventories fell from 226.1 million barrels on October 23, 2020, to 215.7 million barrels on October 22, 2021, a 5% decrease. Distillate inventories in the United States are down 20% over the same period. Although the price of crude oil is the largest contributor to gasoline and distillate prices, the high inventory draws are contributing to higher crack spreads (the difference between petroleum product prices and crude oil prices). On the U.S. Gulf Coast, wholesale gasoline crack spreads averaged 42 cents per gallon (gal) in October (through October 25), up from 14 cents/gal in October 2020. Global product inventories for gasoline and distillate at international trading hubs Amsterdam-Rotterdam-Antwerp (ARA) and Singapore are similarly down this year (Figure 3). As of October 21, ARA gasoline inventories are down 40% from the same time last year, and distillate inventories are down 20%. October 2021 gasoline crack spreads in the ARA hub are more than double compared with crack spreads in October 2020, and distillate crack spreads are more than triple. In Singapore, declines in gasoline and distillate stocks have also contributed to higher gasoline and distillate crack spreads in the region from October 2020.
U.S. average regular gasoline and diesel prices increase
The U.S. average regular gasoline retail price increased more than 6 cents to $3.38 per gallon on October 25, $1.24 higher than a year ago. The East Coast price increased nearly 10 cents to $3.34 per gallon, the Gulf Coast price increased nearly 8 cents to $3.06 per gallon, the West Coast price increased nearly 6 cents to $4.07 per gallon, and the Midwest price increased nearly 2 cents to $3.22 per gallon. The Rocky Mountain price decreased nearly 1 cent to $3.56 per gallon.
The U.S. average diesel fuel price increased more than 4 cents to $3.71 per gallon on October 25, $1.33 higher than a year ago. The Gulf Coast price increased more than 6 cents to $3.48 per gallon, the West Coast price increased more than 5 cents to $4.28 per gallon, the East Coast and Rocky Mountain prices each increased nearly 5 cents to $3.70 per gallon and $3.78 per gallon, respectively, and the Midwest price increased nearly 2 cents to $3.63 per gallon.
Propane/propylene inventories rise
U.S. propane/propylene stocks increased by 2.0 million barrels last week to 75.7 million barrels as of October 22, 2021, 13.5 million barrels (15.2%) less than the five-year (2016-2020) average inventory levels for this same time of year. Gulf Coast, East Coast, and Rocky Mountain/West Coast inventories each increased by 1.2 million barrels, 0.7 million barrels, and 0.1 million barrels, and Midwest inventories increased slightly, remaining virtually unchanged.
Residential heating fuel prices increase
As of October 25, 2021, residential heating oil prices averaged more than $3.40 per gallon, nearly 4 cents per gallon above last week’s price and $1.26 per gallon higher than last year’s price at this time. Wholesale heating oil prices averaged almost $2.66 per gallon, more than 2 cents per gallon below last week’s price but $1.41 per gallon above last year’s price.
Residential propane prices averaged nearly $2.72 per gallon, almost 3 cents per gallon above last week’s price and nearly 92 cents per gallon above last year’s price. Wholesale propane prices averaged almost $1.57 per gallon, nearly 7 cents per gallon below last week’s price but more than 87 cents per gallon above last year’s price.
For questions about This Week in Petroleum, contact the Petroleum Markets Team at 202-586-4522.