Crude oil and gasoline prices increased in 2021 as demand growth outpaced supply growth (1/5/2022)

By admin In Chemical Industry On January 6, 2022



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Crude oil and gasoline prices increased in 2021 as demand growth outpaced supply growth

The Brent crude oil price increased from 2020 to average more than $70 per barrel (b) in 2021 as global demand for petroleum products increased faster than production, leading to global inventory draws. Nominally (not adjusted for inflation), the annual average crude oil price reached its highest level since 2018. Crude oil prices are the largest determinant for wholesale and retail gasoline prices, which were at their highest nominal levels since 2014.

The Brent crude oil front-month futures price increased throughout 2021 after starting the year at $51/b. In February 2021, the Brent crude oil price averaged $62/b, rising to $66/b in March. From June through December, monthly Brent crude oil front-month futures averaged more than $70/b, and prices in October and November averaged more than $80/b (Figure 1). The front-month futures price for West Texas Intermediate (WTI) crude oil followed a similar path as Brent, increasing from a January average of $52/b to an average of $72/b in December. The price of WTI crude oil averaged $2.85/b less than Brent in 2021.

Figure 1. Crude oil front-month futures prices

Crude oil prices decreased during three distinct periods in 2021, all of which were related to developments in the COVID-19 pandemic. The first crude oil price decrease occurred in mid-March as COVID-19 cases increased, notably in Europe. Also at this time, COVID-19 case counts were beginning to increase in India, which saw significant declines in petroleum consumption in the second quarter of 2021 as a result of responses to higher COVID-19 counts. Crude oil prices decreased a second time in August as COVID-19 counts increased with the spread of the Delta variant, which caused market concerns for lowered demand. Crude oil prices fell a third time beginning on November 26, when the front-month futures price for Brent crude oil decreased by $9.50/b, or nearly 12%, after the World Health Organization designated the SARS-CoV-2 Omicron variant as a variant of concern. Nevertheless, by December, the average Brent crude oil front-month futures price was $25/b higher than in December 2020.

During the first two months of 2021, expectations that petroleum product demand would increase as the COVID-19 vaccines became available likely explained crude oil price increases. As the year progressed, vaccination and employment rates increased, the number of people open to travel increased, and the expectations of more demand for petroleum products were realized. Crude oil prices also increased because global production increased more slowly than demand, mostly as a result of OPEC+ production cuts. OPEC+ members announced limitations on production increases in December 2020, and Saudi Arabia announced additional unilateral production cuts of 1.0 million barrels per day (b/d) for February and March that contributed to continued price increases throughout the year. In addition, U.S. crude oil production in 2021 averaged 0.1 million b/d less than its 2020 level and 1.1 million b/d less than its 2019 level. Severe weather disruptions in February and August contributed to this decrease, but the decline in investment among U.S. oil producers since mid-2020 also played a role.

Increasing demand and decreased supply resulted in consistent global petroleum inventory withdrawals from February through December that contributed to increasing crude oil prices. The largest draw was in February, when Saudi Arabia voluntarily cut crude oil production by 1.0 million b/d and the United States experienced extremely cold weather that led to well freeze-offs and a 1.3 million b/d decline in crude oil production (Figure 2). Global withdrawals were also high in June, one month before OPEC+ announced that it would begin increasing crude oil production each month. We estimated in our December 2021 Short-Term Energy Outlook (STEO) that petroleum inventories decreased by 469 million barrels globally in 2021. Although the 2021 inventory withdrawal estimate is still preliminary, if realized, it would represent the largest annual petroleum inventory withdrawal since 2007.

Figure 2. Global petroleum and liquid fuels inventory change

Rising crude oil prices contributed to an increase in the front-month futures price of reformulated gasoline blendstock for oxygenate blending (RBOB, the petroleum component of gasoline used in many parts of the country). In 2021, RBOB reached its highest nominal price since September 2014. The RBOB futures price began the year at $1.37 per gallon (gal), but it increased to more than $2.00/gal in early March and reached as high as $2.52/gal on October 26 (Figure 3). In addition, the RBOB–Brent crack spread (the difference between the price of RBOB and the price of Brent crude oil) in 2021 was higher than the five-year (2016–2020) average and set five-year record highs for most of the year. In August, the crack spread averaged $0.55/gal, the highest monthly average since July 2015. High crack spreads indicate that the high gasoline prices were not only due to high oil prices, but also to factors specific to gasoline. In 2021, the most significant contributing factor to the high RBOB-Brent crack spreads was likely strong gasoline demand. In addition, supply-side factors, including reduced U.S. refinery capacity in 2021, further contributed to low gasoline inventories and higher crack spreads. Higher feedstock and blending costs because of higher butane and ethanol prices also likely added some upward pressure to the RBOB-Brent crack spreads.

Figure 3. RBOB front-month futures price, RBOB-Brent crack spread, and five-year average crack spread

We estimated in our December 2021 STEO that U.S. gasoline consumption, while still less than in 2019, has mostly returned to pre-pandemic levels. We estimate that U.S. gasoline consumption averaged 8.8 million b/d in 2021 and consumption in the fourth quarter of 2021 totaled 0.2 million b/d (2%) less than in the fourth quarter of 2019. Similar to crude oil and RBOB prices, nominal U.S. average retail gasoline prices increased to the highest average annual level since 2014, averaging $3.01/gal for the year.

On May 17, the average U.S. retail price for regular grade gasoline passed $3.00/gal for the first time since October 2014. The retail gasoline price continued to increase, peaking at $3.41/gal on November 8 and finishing the year at $3.28/gal, $1.03/gal higher than at the start of the year (Figure 4). U.S. gasoline prices vary regionally, reflecting local supply and demand conditions and differences in state fuel specifications and taxes. The retail price for regular grade gasoline in 2021 averaged $2.93/gal on the East Coast (PADD 1), $2.87/gal in the Midwest (PADD 2), $2.67/gal on the U.S. Gulf Coast (PADD 3), $3.16/gal in the Rocky Mountains (PADD 4), and $3.70/gal on the West Coast (PADD 5).

Figure 4. Weekly regular gasoline retail price

U.S. average regular gasoline price increases, diesel price decreases

The U.S. average regular gasoline retail price increased nearly 1 cent, remaining virtually unchanged at $3.28 per gallon on January 3, $1.03 higher than a year ago. The Gulf Coast price increased nearly 4 cents to $2.94 per gallon, the West Coast price increased more than 1 cent to $4.14 per gallon, and the Midwest price increased less than 1 cent, remaining virtually unchanged at $3.03 per gallon. The Rocky Mountain price decreased more than 2 cents to $3.37 per gallon, and the East Coast price decreased nearly 1 cent, remaining virtually unchanged at $3.24 per gallon.

The U.S. average diesel fuel price decreased less than 1 cent to $3.61 per gallon on January 3, 97 cents higher than a year ago. The Rocky Mountain price decreased nearly 2 cents to $3.69 per gallon, and the Midwest, Gulf Coast, and West Coast prices each decreased less than 1 cent, remaining virtually unchanged at $3.48 per gallon, $3.33 per gallon, and $4.37 per gallon, respectively. The East Coast price increased less than 1 cent, remaining virtually unchanged at $3.60 per gallon.

Propane/propylene inventories decline

U.S. propane/propylene stocks decreased by 0.7 million barrels last week to 65.7 million barrels as of December 31, 2021, 5.0 million barrels (7.1%) less than the five-year (2016-2020) average inventory levels for this same time of year. Midwest inventories decreased by 0.7 million barrels, and East Coast and Rocky Mountain/West Coast inventories each decreased by 0.1 million barrels. Gulf Coast inventories increased by 0.1 million barrels.

Residential heating oil prices increase, residential propane prices decrease

As of January 3, 2022, residential heating oil prices averaged almost $3.40 per gallon, 3 cents per gallon above last week’s price and nearly 94 cents per gallon higher than last year’s price at this time. Wholesale heating oil prices averaged almost $2.51 per gallon, more than 4 cents per gallon above last week’s price and nearly 91 cents per gallo¬¬n above last year’s price.

Residential propane prices averaged $2.70 per gallon, less than 1 cent per gallon below last week’s price but almost 69 cents per gallon above last year’s price. Wholesale propane prices averaged $1.30 per gallon, more than 6 cents per gallon above last week’s price and nearly 41 cents per gallon above last year’s price.

For questions about This Week in Petroleum, contact the Petroleum Markets Team at 202-586-4522.

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