Fuel & Freight Update | Evolving Impacts of COVID-19 & OPEC+ Conflict on U.S. Markets

Email Breakthrough on Linkedin Breakthrough on Instagram

The past week was filled with more historic crude oil and diesel price swings. COVID-19’s demand destruction and supply stories centered on Russia and Saudi Arabia’s shifting crude oil strategies amounted to the largest weekly oil price percentage decline in nearly three decades. WTI and Brent crude oil prices fell to their lowest levels since early 2002 mid-week, before rebounding slightly to end the week at $22.43 and $26.98 per barrel, respectively. Wholesale diesel prices also decreased to four-year lows, closing the week at $1.74 per gallon.

As of market close on March 23, benchmark crude oil prices rose less than $1.00 per barrel, while diesel prices increased about $0.01 per gallon. This energy price turbulence continues to unfold while domestic freight demand remains robust as consumers empty store shelves in an ongoing inventory challenge for suppliers and vendors.

Energy Market Impact

Implications of Current Market Conditions for the U.S. Energy Sector

The rapid evolution of COVID-19 still makes true energy market balance a moving target. Demand is currently more dominant than the market’s relatively unchanged supply fundamentals, even as measures to combat the pandemic have escalated. That said, many producers will likely be forced to make supply adjustments in the wake of oil prices that are too low to cover their financial obligations.

Prior to the energy market’s slide, the U.S. continued producing more oil than ever. Domestic output surpassed 13 million barrels per day in February and helped the U.S. retain its status as the world’s top producer. The current price environment and resulting sentiment around oil companies beginning to adjust operations could end U.S. production growth until supply and demand tighten and prices become more economically viable.

Many U.S. shale producers have already voiced plans to lay off crew members and reduce the number of operable oil production rigs. The downward trend in U.S. rig counts has been ongoing due to improved efficiencies that allow companies to produce more with less. A shifted focus in the past year, however, to “profit over production” amid mounting pressures from investors for maximized returns has led to a steadier downward trend in rig totals. The expected dip in rig counts is more of a forced financial decision based on the oil market’s health than a byproduct of efficiency gains or investor pushback. This all points toward a slowdown in U.S. shale production and acts as another sign of supply-side decisions tied to the oil market’s plummet that could lower U.S. production and eventually tighten the market.

Implications of Current Market Conditions for Crude Oil and Diesel Prices

Prices have continued to decline and hover near record lows as the demand fears of COVID-19 overwhelm global markets. It remains unclear how long the Saudi Arabia-Russia price war will drag on or if some sort of resolve will re-establish production guidelines. The Trump administration threatened to sanction Russia and talked with Saudi Arabia to encourage the re-imposition of a production cut strategy.  Russia has down-played the oil market’s current condition and does not feel the U.S. should interfere, but it remains uncertain whether U.S. intervention will at all influence each player’s strategy.

In the meantime, the U.S. Department of Energy released plans for the U.S. to purchase 77 million barrels of crude oil to replenish the nation’s Strategic Petroleum Reserves (SPR). This is intended to support producers most severely hit by 2020’s market events. Current plans suggest about 685,000 barrels of crude oil per day will be directed to the U.S.’ SPR until its maximum storage capacity is reached.

Since last week’s Breakthrough’s Advisor Pulse, U.S. national average wholesale diesel prices have fallen further to levels last seen in early 2016 to around 170 cents per gallon. U.S. wholesale diesel prices have now fallen over 90 cents per gallon since January 1. Lower wholesale prices and delayed changes to the DOE retail index helped the DOE-wholesale spread surpass $1.00 per gallon multiple times in the past week, with national spreads remaining above 90 cents per gallon each day since March 16.

Freight Market Impact

Implications of Current Market Conditions for U.S. Freight Demand

COVID-19’s effects on demand continue to disrupt transportation supply chains.  Freight demand across Breakthrough’s client base has grown since COVID-19 emerged, but certain industries have shown behavioral differences based on consumer needs throughout the pandemic’s spread. Freight demand has accelerated as consumers continue to empty store shelves to stock up on essentials like toilet paper, health products, cleaning supplies, and food items.

The chart below highlights that when COVID-19 first struck, freight demand spiked in the Breakthrough Network across the paper products, food and beverage, retail, and consumer packaged goods industries.  Freight demand rose nearly 14 percentage points in these industries since COVID-19 began and roughly 12 percentage points compared to last year’s volumes.  We chose to focus on these industries because of their direct connection to COVID-19 and its influence on consumer buying patterns.

Breakthrough Non-Durable Goods Shipments include Breakthrough clients in the following industries: Consumer Packaged Goods, Food & Beverage, Paper & Packaging, and Retail. Clients used in the analysis consist of shippers who started Breakthrough Fuel Recovery on or before August 2018. Additionally, the large dip in freight demand at the end of December can be attributed to the Christmas and New Year holidays.

Looking ahead, we expect short-term freight demand to stay resilient.  The growing possibility of a bullwhip effect as a result of consumers aggressively stocking up on everyday products could force demand for these goods to decline in the medium term. Once the initial panic subsides and/or the outbreak halts more U.S. businesses, we could see a lull in freight demand across all industries. However, demand may not fall as drastically in some industries based on consumer preferences.

Additionally, initial jobless claims—released by the U.S. Labor Department—reported the fourth largest jump on record last week.

This indicates that unemployment could tick up in March, further hampering consumer goods and freight demand. If mass layoffs occur, consumers will likely limit their spending.  The U.S. government is currently working on a $2 trillion stimulus package in response to this evolving economic uncertainty, but its success—if passed—hinges on the lifespan of COVID-19.