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.
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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.
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.
All eyes are on the pace of US economic restarts and gasoline demand reversion, which was characterized universally among Refiners through earnings season as up 10%-20% off the bottom. The ultimate oil demand recovery (inclusive of potentially higher than expected summer 2020 gasoline demand on price elasticity and “drive-not-fly” behavior) may not be strong enough to restore crack spreads to 2019 levels, given a broader recession. However, even with softer crack spreads for the remainder of 2Q and potentially into 3Q, Refiners should get a cash recovery from the reversal of working capital losses in 1Q, which amounted to between $2-$8/bbl of throughput across the sector. Stocks generally did not react negatively to the working capital headwinds reported for 1Q, so the reversal may not be a catalyst, but the magnitude of cash potentially coming back through the remainder of 2020 is a nice directional liquidity tailwind in times of margin stress.
Refinery yield shifts – i.e., refineries producing less gasoline and more distillate – are evident in commodity pricing, with gasoline cracks converging on diesel and in some regions moving higher. Cracks for both commodities across all regions are down y/y. With gasoline demand beginning to rise slowly from the bottom (according to every company this earnings season) and gasoline production still low, inventories are beginning to draw, and gasoline is likely to outperform diesel.
On its earnings call last week, VLO noted there were a number of commodity signals that would normally signal higher utilization, including wide crude differentials, attractive HSFO discounts, and market structure (i.e., contango). However, the company and the rest of the industry was remaining disciplined to keep throughput aligned with demand, which had successfully corrected the course of gasoline inventories and averted a potential inventory capacity problem. But with some of the positive margin signals beginning to peak and decay, and with EIA reporting an uptick in refinery utilization last week, the natural question is whether the rest of the industry will be as disciplined, and whether demand can come back in time if utilization gets ahead of itself. With some states beginning a reopening process, the hope is that demand normalizes simultaneously with a potential commodity-driven increase in refinery utilization.
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