On August 26th, DTN Director of Market Insights Dominick Chirichella led a webinar jam-packed with analysis and insight regarding the state of the fuel markets, and what to expect in the months to come. The full recording is available here. In the meantime, here’s a quick recap of the major points.
Of course, the biggest question on everyone’s mind is, “When will things get back to normal?” Dom explained that the short answer is, “Not anytime soon.”
First of all, it is likely that a vaccine will be available later than initially expected, with only seven candidates currently in “phase three” clinical trials. And some of those trials are having a hard time finding volunteers. While vaccine news has a small impact on fuel pricing, it has virtually no impact on short-term oil consumption. The bottom line is: until and unless there is a successful COVID-19 vaccine in wide use, demand will never recover to 2019 levels.
Additionally, the uneven economic restart—varied by region—means some small areas are recovering while others languish. While we’ve seen consumer gasoline demand recover from the Depression-level depths of late March, we are still in an economic recession; well below last year’s demand. Widespread, extended unemployment combined with rising consumer commodity inflation has depressed the consumer confidence index; a key leading indicator of economic recovery.
Demand recovery has flatlined, indicative of a possibly permanent change in consumer behavior. Many companies have found that employees are just as productive at home as they were in the office. Expensive business real estate sits empty, and many of the attendant jobs to traditional office space (e.g., mechanical, janitorial, security) may not ever come back, even post-vaccine.
On the other side of the equation, we’re seeing oil supply tick up alongside demand. While wholesale prices have essentially doubled from their low in April, retail prices remain low. This has led to improving margins. Other good news is that distillate fuel demand has increased significantly, as more consumers order goods online, leading to greater shipping and trucking fuel demand. However, there is still a massive supply glut, globally.
Another factor energy market leaders need to watch is the increasing momentum toward low-carbon and renewable energy, especially with a possible change in the U.S. political landscape that would accelerate this trend.
Lastly, Dom emphasized that geopolitical risk is the single largest factor in determining (and predicting) market activity. It’s important to remember that “geopolitical risk” is more than just trade wars or armed conflict. For example, Hurricane Laura is shutting down refineries in Texas and Louisiana as I type this, and the impact to refinery output could be long-term, particularly if she strengthens as predicted to a Category 4 “major” hurricane.
Looking forward, we are clearly in a recession, and this should be expected to continue. Demand will stay depressed well into 2021, and perhaps beyond. There could be a large second wave of COVID-19 cases, and the seasonal flu is just beginning to look upon the northern hemisphere, further complicating public health management, going into the fall and winter months.
Energy market traders and executives should expect wide-ranging volatility for the foreseeable future and be prepared to move quickly.
Of course, there were more details in the webinar than I can fit into this brief synopsis, so I encourage you to watch the full recording.
Our next installment of DTN Insights will be a white paper this fall, looking ahead to the home heating oil and natural gas markets as the northern hemisphere heads into winter, as well as a review of the impacts of the 2020 hurricane season. Learn more about our industry experts.