FUELSNews 360° – Executive Summary

The third quarter of 2020 brought as much turmoil as the first. From negative oil prices to the deepest global depression in history, markets experienced unprecedented events in Q2 that will ripple through markets for years.

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Although 2020 has developed a reputation for volatility and uncertainty, the third quarter brought a stay for oil markets, with prices remaining range-bound while fundamentals slowly subsided to normal levels.

Oil markets fundamentals are at an impasse. The OPEC+ alliance has committed to setting a floor for oil prices, and their historic cuts earlier this year show they will follow through. Conversely, worldwide oil demand remains well below pre-COVID levels, keeping a lid on upward price movements.

World GDP has become a particularly challenging item to forecast, and agencies differ widely on their expectations for 2021 and beyond. While some agencies expect an expedient recovery, others suggest the lingering impacts of lockdowns will cause tepid growth for years to come.

Whichever analysis is correct, all signs point to global conditions eventually returning to normal. OECD oil days of supply exploded above 80 days during the pandemic, but forecasts show days of supply falling back to a more typical
65-day level by early 2021. For consumers, normalizing inventories suggest higher prices could be on the way in 2021.

Despite improving fundamentals, some pockets will inevitably experience prolonged setbacks. US oil producers could fit that description; crude output remains low despite WTI crude recovering to $40/bbl. Oil & Gas companies will focus on cash flow preservation and maintaining production over the coming quarter, rather than adding new supplies.

At the same time, suppressed fuel prices caused by low demand present a challenge for refineries. Crack spreads remain stubbornly low, causing refinery utilization to remain low. Many refiners face financial pressures due to high crude costs and low output, and refinery closures, restrictions, and conversions increased during Q3.

Forecasting the future of energy prices is challenging, considering the many moving factors such as public health, government stimulus measures, economic lag, and geopolitical challenges. There are plausible scenarios in which prices experience another bear run to $20/bbl or less. Conversely, a quick recovery and a rally to $50/bbl is not out of reach. Absent a major deviation from current trends, though, expect prices to end the year within the same range maintained in Q3. For more analysis on where prices will end 2020, check out the Mansfield Supply Team’s forecast on page 36.

Around the US, regional challenges added to uncertainty. The Gulf Coast experienced one of the most active hurricane seasons on record, but plenteous inventories and weak demand kept markets appeased despite prolonged refinery closures. For more, Matt Smith describes PADD 3 Gulf Coast fuel trends on page 24.

Pipeline challenges also caused some short-term scares during the quarter. On the East Coast, the Colonial Pipeline experienced a small leak in North Carolina, requiring it to close its gasoline line north of Atlanta and co-mingle products beyond that point. Gabe Aucar shares more details on page 21.

Pressured by low crack spreads, refineries are seeking novel ways to remain profitable. On page 28, Brent Fergeson, Supply Director, describes the latest trend of West Coast refineries switching to renewable diesel production to take advantage of local blending economics and tax credits.

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