Uncertainty continues to shroud the return path to pre-pandemic business as usual as new COVID-19 cases have begun to accelerate in various parts of the country. While some cities and states have begun to roll back their re-opening efforts, it is becoming apparent that the trough in domestic oil demand spurred by simultaneous economic shut-down measures on a massive scale is behind us. Today’s Energy Market Insight will compare forecasted US refining demand recovery to the 2008/2009 Global Financial Crisis to weigh optimism versus a tepid path forward.
The US refining demand response to COVID-19 was rapid and substantial at over 3.7 MMb/d evaporating from the 2019 average level to May 2020, differentiating this event from all other disruptions in history. As such, comparing this event to the next most recent major disruption in history, the 2008/2009 Global Financial Crisis, is not entirely fair. However, the duration of recovery from that event highlights that a v-shaped recovery to COVID-19 seems optimistic. Due to seasonality in refining demand and the slow decline in throughput during the Global Financial Crisis, the chart below applies a trailing 12-month average to refinery throughput following the 2008/2009 Global Financial Crisis. Given the rapid decline in crude throughput spurred by the COVID-19 pandemic, no such average is applied to either BTU’s or the EIA’s throughput forecasts. Each dataset is indexed to the previous calendar year unaffected by each disruption (2007 for the 2008/2009 Global Financial Crisis, and 2019 for COVID-19 pandemic).
The trailing 12-month average of US refining demand during the 2008/2009 Global Financial Crisis took 43 months to crest the average demand in 2007. This economic disruption began with a slow decline to the refining demand trough by early 2010, which was followed by an even slower recovery by late 2013. The Global Financial Crisis’ impact on US refining demand was not as acute as COVID-19’s, but the recovery from the lowest point still took several years. EIA’s US refining inputs forecast from their July 2020 Short Term Energy Outlook (STEO) shows nearly a full recovery in US refining throughput in 2021, which was aided by an assumed v-shaped recovery in demand as restrictions ease. This pace tracks with the EIA’s forecast for a global crude demand recovery in 2021, even though US crude demand has historically lagged global growth rates and significantly lagged the global crude demand recovery following the Global Financial Crisis. BTU Analytics’ demand forecast calls for a more lagged recovery, lasting until early 2023. COVID-19’s impact on US refining demand is different from any prior event in history, so it is difficult to draw on prior demand disruptions without the context of the underlying demand sources.
The July 2020 STEO also included updated supply forecasts for motor gasoline, distillate fuel oil, and jet fuel, which are indexed to 2019 levels in the above chart. Jet fuel supply faces a challenging recovery as air travel is not expected to return to pre-pandemic levels for several years, extending outside this forecast window. Even so, jet fuel demand still shows a rapid increase through 2021 even as business and leisure travel are likely to see lasting impacts from COVID-19. The recovery in the EIA’s forecast for motor gasoline supply is driven by employment growth in the second half of 2020 and 2021 and largely mirrors their overall refining demand forecast recovery. While increases in employment are expected to drive motor gasoline consumption over the next 12-18 months, it appears that overall economic activity will lag employment gains based on distillate fuel oil supply, which is largely used for shipping, construction equipment and heating. There appears to be a disconnect between growing employment and slowly recovering economic output based on motor gasoline and distillate fuel oil supply trajectories, which could challenge the overall US refining demand recovery slated to take roughly one year.
As near-term demand statistics enter the public domain, the plausibility of a v-shaped recovery will be tested. The overall outlook for the US economy is poised to have significant ramifications on US refining demand forecasts, especially those calling for swift recovery. To keep apprised on the rapidly changing dynamics affecting liquids pricing and balances, including forecasts for the global crude demand recovery, request information about BTU Analytics’ Oil Market Outlook.