Fuel & Freight Market Update | Ongoing Impacts of COVID-19 & OPEC+ Conflict
March 17, 2020
The global economic fallout tied to the coronavirus pandemic (COVID-19) has continued to sweep through energy and freight markets. Actions to combat the virus’s unprecedented impact have intensified, leading to supply chain disruptions, travel bans, and widespread lockdowns across most of the world’s largest economies. These supply and demand fundamentals have amounted to a historic energy market plunge in recent weeks, with demand acting as perhaps the largest catalyst under current conditions.
As of market close on March 16, benchmark crude oil prices fell approximately $3.00 more per barrel to below $30, while diesel prices decreased another $0.09 per gallon. Domestic freight demand has bucked this downward trend as of late due to consumers’ abrupt need for many household goods.
COVID-19 Impacts on Energy Market
How has Crude Oil Demand Changed in Response to the Virus?
Global demand for crude oil and transportation fuels has continued declining due to COVID-19 and the measures enacted to slow its expansion. Airlines have cut several flights, many countries are under some form of lockdown, and personal travel has dipped. These efforts all lead to softer demand for crude oil and refined products. The International Energy Agency recently decreased its 2020 oil demand forecast by 1.1 million barrels per day, with a 2.5 million barrel per day decline projected for the first quarter.
The U.S. Energy Information Administration also released an updated forecast for international crude oil supply and demand, reinforcing the fact that market imbalance is likely to persist through the coming quarters. This is highlighted in the chart above, as are other periods of significant imbalance dating back to the financial crisis of 2008. Each of these periods came with bearish price behavior that compares to what we are currently seeing, but under far different circumstances. Oil demand outlooks and supply-side developments remain as fluid as the spread of the virus itself, adding more uncertainty to the market.
What has Changed on the Supply Side of Crude Oil Dynamics?
The failed OPEC+ meeting in early March soon gave way to a Saudi Arabia-Russia price war as the group completely abandoned existing production cuts. This multiplied concerns of an over-supplied market during COVID-19’s demand shock. The status of the OPEC+ relationship remains unknown and participants have continued operating under the “produce as much as you want” mentality. Key producers are now fighting for market share regardless of oil prices that are not economically viable.
The oil market’s current price environment at sub-$35 per barrel raises the question of how long producers can operate at current levels while also facing headwinds tied to production costs and budget requirements. Sentiment has largely remained unchanged in that Saudi Arabia and Russia are committed to increasing production to maximum capacity, for the time being. This means other producers may be forced to take action that prevents a further supply glut.
The United States, for example, has raised the possibility of replenishing its Strategic Petroleum Reserves under the existing low-price window to remove barrels from the market and offer some price support. An oversupplied oil market appears to be the reality for the foreseeable future, and ultimately is a concern for oil producers that extends beyond the COVID-19 demand shock.
How Will This Influence Crude Oil and Refined Products Prices?
COVID-19 and the relatively unchanged narrative on the OPEC+ front have pushed U.S. national average wholesale diesel prices below the 190 cents per gallon mark for the first time since late 2016. Since January 1, U.S. wholesale diesel prices fell nearly 80 cents per gallon, with the additional market dive on March 16 sending wholesale prices down another 7-10 cents per gallon on March 17.
The wholesale market’s steady slide and delayed adjustments to the DOE retail index caused the DOE to wholesale price differential to exceed 90 cents per gallon for the first time since January 2015. Canadian wholesale diesel prices have followed a similar pattern, falling below 90 CAD cents per liter for the first time since mid-2017.
This downward price path is likely to continue until COVID-19 is contained, an economic rebound occurs, or constraints are reintroduced on crude oil and refined product supply. Summer driving season and refinery maintenance periods do offer some seasonal upside that will likely support prices in the next few quarters. However, their ability to trigger a major upward price rebound will depend on how long the supply-demand gap stays widened as a result of demand developments from COVID-19 and OPEC’s supply contributions.
Freight Market Impacts
How has COVID-19 affected freight demand?
The COVID-19 outbreak’s effects on demand encompass both energy and freight markets, but with differing levels of magnitude and direction. Overall freight demand across Breakthrough’s client base has grown since COVID-19 emerged, but certain industries have shown slower growth rates depending on consumer needs amid the pandemic’s spread. Consumers have emptied store shelves to stock up on essentials, like toilet paper, health products, and cleaning supplies. As a result, freight demand ticked up in many industries to deal with the surge in demand for everyday essentials. Federal hours of service requirements were also lifted for essential products to help meet the rising demand.
The chart below highlights that when COVID-19 first struck, freight demand in the Breakthrough Network for paper products and consumer packaged goods spiked. Freight demand rose roughly 8 percentage points in both industries since the COVID-19 outbreak began and roughly 14 percentage points above last year’s volumes. Furthermore, freight demand for paper products and consumer packaged goods—such as toilet paper and cleaning supplies—surpassed 2018 levels when the U.S. was economically thriving. We chose to focus on these industries because of their direct connection to COVID-19 and its influence on consumer buying patterns.
Looking ahead, we expect freight demand to continue to stay strong in the short term. Once the initial panic subsides and/or the outbreak halts U.S. businesses, we could see a lull in freight demand in all industries. The current surge has caused consumers to stockpile everyday products, meaning demand for these goods should decline moving forward.
View our past market updates in response to COVID-19 and recent OPEC+ dynamics below:
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