Crack spreads crashed below cash costs in most regions but have potentially hit a near term bottom. While demand remains impaired, crude supply should be loosening in the near term as OPEC imports land in the US and L48 production curtailments reverse. That’s the good news. The not-good news is that the oil demand recovery is slower than expected, as the commuting headwind (35% of gasoline demand) is extending in duration. Leisure travel appears to be improving rapidly (based on hotel occupancy) but even with that contribution, demand could plateau at too low a level to support a recovery in crack spreads beyond prior trough-cycle levels.
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Underlying figures and additional commentary inside. Takeaways are positive. Despite an above consensus inventory build forecast, we view the lower US-bound AG-OPEC exports, declining other swing supply (mainly Russia) and depressed Asia-bound AG-OPEC exports favorably.
It takes sunlight 8 minutes to reach Earth, so staring at the sun is also staring into the past. Staring at an EIA report lately can be equally painful, but similarly backward looking: this week’s reported ~10MM bbl total crude inventory build (including the SPR) was partially driven by a ~1MM bpd increase in Saudi imports (preliminary estimate). However, those volumes were produced in the April program, and even though they are represented in inventory changes today, reflect a supply/demand balance that has since been meaningfully tightened.
Underlying figures and additional commentary inside. Takeaways are positive overall. While we forecast a small crude inventory build, the ClipperData feed showed exports trending down w/w, from both AG-OPEC and Other Swing producers.
The correlation between the trend in Apple Mobility Data and EIA weekly gasoline demand fell apart last week, with Apple continuing to post rising maps usage in cars but EIA demand down ~0.6MM bpd. The weekly demand downdraft is probably anomalous, since as mentioned last week we expect some weird EIA gasoline demand outcomes in a lower average demand regime, as inventory in cars is not captured by the EIA. Even with a disappointing EIA result last week, the market influence of Apple data should be tested tomorrow, as the Memorial Day Friday driving index reading of >125 was the highest since the crisis started. As a reminder, Apple mobility data is indexed to a single day – Jan 13th – representing 100. Jan 13th itself was a lower than normal demand day, evidenced by the fact that the four weeks forward from that day averaged >108. So, on a seasonal basis, a true “summer driving season” demand figure is something above >120.
Underlying figures and additional commentary inside. Takeaways are neutral overall. Our inventory build is above consensus, though AG-US exports remained fairly low and AG-Asia exports declined w/w. MTD May AG-OPEC total exports are also trending down steeply vs April, confirmatory of the OPEC+ cuts.
We had intentionally left out discussion of the widely followed Apple Mobility Data since we didn’t think it added any value beyond what Refiners had already publicly said about gasoline demand – i.e., that it’s rising steadily off the mid-April bottom. But, with the Apple data breaking above the January reference point over the past two days (through 5/16), and Refining stocks up double digits in response, its influence clearly warrants some analysis.
With a new oil supply/demand model and a framework based on a 2021 scenario analysis, we are downgrading Refiners to Market Weight and keeping IOCs Market Overweight, with a view that crude has a higher probability of positive outcomes next year than crack spreads do. The outlook is highly uncertain, but we are focused on Refiners delivering idiosyncratic growth or catalysts (VLO, MPC, DK) while we believe Brent crude has a higher likelihood of approaching 2019 levels than cracks do.
We are downgrading PSX to Peer Perform, in the context of also lowering of the Refining sector to Market Weight. PSX remains a world class operator with ample liquidity to weather a prolonged margin downturn, plus some elements of advantaged end-market exposure through the chemical business relative to refining peers. However, PSX’s key growth segments – Chemicals and Midstream – are largely correlated to growth in US liquids production, which we believe could be structurally lower through 2021, with more years until US liquids production returns to exit 2019 levels.
Underlying figures and additional commentary inside. Takeaways are neutral. Our inventory build is above consensus. While AG-US exports have been trending down, exports to Asia remain on the high side. AG-OPEC exports for May thus far are down sharply sequentially, though that was expected given the OPEC+ cut.
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