As with just about everything in 2020, the fuel markets had an extraordinary year. West Texas Intermediate (WTI) future prices settled in negative territory on April 20, refinery runs plunged to the lowest levels ever, demand plummeted to the lowest levels in decades (station volumes dropped 47.5% compared with 2019), and retail margins peaked at nearly a dollar while consumers enjoyed some of the lowest prices in years at the pump.
Denton Cinquegrana, chief oil analyst, OPIS by IHS Markit, reviewed the events that shook the oil and refined product markets in 2020 and provided some insights into what the sector might see this year.
“It was an eventful first quarter,” Cinquegrana said of 2021. “Prices are rising. Petroleum futures reached their highest levels in more than a year, and that’s the same with the physical spot markets and racks. Obviously, as a result, retail gasoline prices are near a two-year high and are near the level last seen around Memorial Day 2019.”
The global oil glut that marked 2020 is finally starting to rebalance through OPEC+ supply cuts and increasing demand. The deep freeze in the South also resulted in numerous refinery and pipeline shutdowns, along with shutdowns from margin pressures. “We are still running above the five-year average, but the 50 to 100 million barrels over the five-year average is well in the rearview mirror,” Cinquegrana said. Crude oil inventories were consistently 50 million barrels or more above the five-year average from mid-May 2020 through mid-September. The peak was 79.3 million barrels over the five-year average during the week of July 17.
Demand has made significant strides from the dark days of April 2020, but it still lags significantly behind pre-pandemic levels. However, the public is expressing optimism over the possible easing of COVID-19 restrictions. Some analysts have predicted that demand will return to the 10-million-barrels-a-day level on a weekly basis. Cinquegrana is not nearly as bullish. “We think gasoline demand is obviously going to be stronger in the summer, but I don’t believe you’ll see a 10-million-barrel-a-day week,” said Cinquegrana. “You’re going to see some really strong weeks of demand, but we’re going to struggle to reach nine million barrels a day as an annual average.”
Retail Gasoline Price and Margin
OPIS predicts that the January retail price of $2.25 a gallon of gasoline will likely remain the low price for the coming year. Cinquegrana noted that circumstances can obviously change, but there is a high degree of confidence in the assessment.
Retail margins have been solid for the past several years, with 2020 being “off the charts,” driven by the unprecedented circumstances. Margins peaked at 95.5 cents per gallon on March 24, 2020, and have generally run between $0.20 per gallon and $0.40 per gallon from May through December 2020. During this period, they averaged $0.36 per gallon.
Cinquegrana expects margins to remain strong throughout 2021 and perhaps even spend some time above $0.40 during the second quarter, but with upside limits. “Catching up to those super-high numbers is not going to be likely,” he said. “They’ll probably outperform 2019 and 2018, or at least become pretty close. It’s just going to be tough to replicate 2020’s numbers.”
What Impact Will EVs Have?
Cinquegrana commented on demand loss relative to electric vehicle penetration, noting that for all the buzz, the impact is not significant yet. Even with government support, EV adoption will likely take time, and penetration into the fleet is going to be slow and steady.
“EVs are coming, and at some point they’re going to reach critical mass,” Cinquegrana said. “Whether that’s 10 years from now, 20 years from now, 30 years from now—we’re just going to have to keep an eye on things. The vehicle fleet turns over slowly.”
There are about 1.3 billion cars on the road globally today. Current annual electric vehicle registrations total about 255,000 in the U.S., but light vehicle registrations still overwhelmingly consist of internal combustion engines (approaching 85%).
According to Cinquegrana, EVs were expected to displace 400,000 barrels a day of oil demand globally in 2020. That was projected to triple by 2025 to about 1.5 million barrels a day. Even if that tripled again by 2030, EV displacement would still only represent about 5% of global oil demand. And this turnover might now be slower than expected, even with the current push by the Biden Administration and state governments such as California and Oregon.
“A lot of us are still working from home, and some of us are working from home permanently now, myself included,” Cinquegrana said. “So now, instead of putting maybe 15,000 to 20,000 miles on my car, I may only put 3,000 to 5,000 miles on my car in over a year. That’s just going to extend the life of the vehicle I’m driving.”
Cinquegrana noted that the post-COVID-19 impact will not be limited to EV fleet penetration. We have yet to see just what the post-COVID world will truly look like for fuel supply and demand. “The telecommuting phenomenon—what does that mean for demand as we go forward? Is it worth 100,000 barrels a day? Is it worth 500,000? We just haven't figured that out yet. But I think we’ll be able to get a good sense of what telecommuting is doing as people go back to the office over the next several months.”