Fuel & Freight Update | COVID-19 and OPEC+ Conflict Leave Markets Volatile
March 30, 2020
Energy Market Impacts
Oil markets were driven by more bearish news last week following no relaxation of the market dynamics that have pushed oil prices to 18-year lows. COVID-19 continued to crush demand, while the Russia-Saudi Arabia oil price war dragged on as each nation pushed record supply onto an already flooded market.
Pressure from the Trump Administration to restrict Saudi Arabia’s oil production subsided because President Trump’s satisfaction with low fuel prices and a greater focus on COVID-19 containment dampened the U.S.’s ability to constrain overseas supply. The lack of immediate funding also forced the U.S. Department of Energy to indefinitely suspend plans to purchase 77 million barrels of domestic oil in support of U.S. producers. This removed one of the levers meant to stabilize prices in the wake of COVID-19’s demand destruction.
WTI and Brent crude oil prices finished the week at $21.51 and $24.93 per barrel, respectively. This sharp decline followed mid-week stability from stimulus efforts aimed at putting a bandage on the economic fallout tied to COVID-19. Various G20 economies committed over $5 trillion in global aid to overcome the pandemic, with the U.S.—who is now the world’s most infected nation—leading the charge with a $2 trillion bill. Wholesale diesel prices rebounded regardless of the additional oil declines, closing the week about $0.04 per gallon higher than the previous week at $1.78 per gallon.
Other Market Dynamics are Supporting Diesel Prices
Last week’s U.S. wholesale diesel price turnaround suggests the respective supply and demand shocks of OPEC+ conflict and COVID-19 are teaming up with more regional market economics. Price turbulence in the Chicago spot market was a sign of stark regional volatility that has been largely absent since the energy market began its slide earlier this quarter. An $0.11 per gallon diesel commodity spike on March 26 caused wholesale prices in Illinois and neighboring states to follow suit, reinforcing how regional price drivers can overshadow macro-level behavior.
A basis differential indicates how a region’s market price compares to a national benchmark. If prices in a region follow the national market exactly, the basis differential would be zero. A positive or negative value, however, indicates the extent to which the regional market is respectively more or less expensive than the national benchmark.
The Chicago region’s most recent price jump acts as perhaps a sign of more similar behavior to come nationwide. Spring is typically when Midwest diesel demand rises in the agriculture sector and when U.S. refiners finish maintenance in preparation for the summer driving season. These seasonal norms will be compounded by supply pressures from refiners and oil producers adjusting output because of unfavorable margins from low prices across the board.
Jet fuel and gasoline consumption have drastically decreased as COVID-19 weighs on personal and commercial travel. Diesel demand, however, has shown resilience due to robust freight volume from consumers emptying store shelves to build personal inventories amid COVID-19 uncertainty. The pace of diesel demand loss will likely deviate from gasoline and jet fuel so long as travel is disrupted from COVID-19, but demand is still expected to decrease, nonetheless.
The commercial transportation sector’s sustained need for diesel and scaled-down refinery operations have drawn down U.S. diesel inventories in 2020. Since the first week in January, total U.S. and PADD 2 diesel stocks—a proxy for the Midwest region—have fallen 13 and 4 percent, respectively. This has contributed to the recent diesel price rebound at the national and regional levels.
How Have Crude Oil and Diesel Prices Responded to Recent Market Developments?
The uncertain timeline of COVID-19, OPEC+ supply contributions, Russia and Saudi Arabia’s price war make it difficult to gauge just how long prices can remain low. Dwindling storage capacity will likely keep prices lower for longer, especially since COVID-19 is expected to cause demand to decline between 15-20 percent in the second quarter. However, the trend that has overtaken 2020 will likely soon lead to forced actions by oil and refined product producers to tighten supply and gradually reintroduce some upside pressure.
U.S. national average wholesale diesel prices rebounded to about $1.80 per gallon since last week’s Breakthrough Advisor Pulse, remaining at four-year lows. A slight wholesale price turnaround and another delayed downward adjustment to the DOE retail index caused DOE-wholesale spreads to contract, albeit hold above $0.85 per gallon. National average spreads have now averaged over this mark each day since March 13.
Freight Market Impacts
Implications of Current Market Conditions for U.S. Freight Demand
COVID-19 has continued to disrupt transportation supply chains. Freight demand across the Breakthrough Network—particularly in the non-durables space—has grown since the virus emerged and uncovered some telling stories across different industries. Consumer spending on durable and non-durable goods has a direct effect on freight demand for those goods, with distinct differences during an economic slowdown.
Non-durable goods—consisting of Breakthrough client data in consumer-packaged goods, food & beverage, paper & packaging, and retail industries—have seen a significant increase in freight demand as consumers stockpile household essentials.
Breakthrough clients used in the analysis consist of shippers who started Breakthrough Fuel Recovery on or before August 2018. The large dip in freight demand at the end of December can be attributed to the Christmas and New Year holidays.
The chart above highlights that freight demand in non-durable goods industries rose nearly 18 percentage points since COVID-19 first struck. This marks an approximate 15 percentage point increase year-over-year.
The chart below highlights a different story for durable goods. As consumer demand forced shippers of non-durable goods to rush products to stores, durable goods freight demand dropped significantly. This behavioral difference is common during an economic slowdown.
Clients used in the analysis consist of shippers who started Breakthrough Fuel Recovery on or before August 2018. The large dip in freight demand at the end of December can be attributed to the Christmas and New Year holidays.
In a period of uncertainty, consumers become more hesitant to spend more than necessary. If mass layoffs occur and consumer sentiment continues to decline, it is expected that durable goods demand will follow suit. Recent dips in consumer sentiment represent the fourth-largest drop in nearly 50 years. This has contributed to a 5 percent decline in freight demand for durable goods since the outbreak began and a roughly 15 percent decrease year-over-year.
View our past market updates in response to COVID-19 and recent OPEC+ dynamics below:
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