Crude prices trend downward as demand growth stalls

September 9, 2020 By    

We establish benchmark prices for propane and crude oil to help us focus daily on whether we believe those prices are good benchmarks. Our benchmarks are 50 cents per gallon for Mont Belvieu LST propane and $42 per gallon for West Texas Intermediate (WTI) crude. We recently considered moving both up. Propane fundamentals became a little more supportive in a couple of inventory reports from the Energy Information Administration (EIA). One of those reports showed inventory actually declining. With crude in a steady uptrend and inventory building, we were contemplating raising our benchmark price for Mont Belvieu LST to 51 cents as recently as last Tuesday before the EIA report was released Wednesday.

Chart: Cost Management Solutions. Click to expand.

Chart: Cost Management Solutions. Click to expand.

Here is what we said in our daily report last Tuesday: “Last week, propane production dropped 119,000 barrels, following a decline in crude production of around 400,000 barrels per day (bpd) over a couple of weeks. As a result, we are starting to see Mont Belvieu LST propane inching up from our 50-cent-per-gallon benchmark. If we get more supportive data on propane production next week, we may push our propane benchmark up a cent. The feedback we got on exports for the remainder of the third quarter is not good. Assuming production settles at a lower level, it may not be enough to move the needle much on propane. It is going to take help from propane exports, and what we are hearing is that may not come until the fourth quarter. We will be very interested in the production number tomorrow.”

Thankfully, we waited for one more set of data before making the change. EIA reported a 4.389-million-barrel build in propane inventory. That build was 2 million barrels higher than the five-year average for week 34 of the year and industry expectations. As we write, Mont Belvieu LST has dropped to 49 cents.

The big inventory build essentially negated the more supportive data that occurred over the previous two weeks.

Chart: Cost Management Solutions. Click to expand.

Chart: Cost Management Solutions. Click to expand.

It is not just the inventory build that has sent propane lower. A sudden change in crude’s price direction has contributed as well. WTI has been in a slow, shallow uptrend since mid-June. That uptrend had us looking at $43 per barrel as a new benchmark for WTI. But crude took a sharp turn lower this past week.

The uptrend in crude took place because producers cut supplies and economies were opening after the initial shutdowns aimed to contain the spread of COVID-19. The assumption was that demand was going to steadily improve, but that assumption is being called into question now.

Last week, EIA reported a 2.640-million-bpd drop in total petroleum products supplied.

Included in the total was a 375,000 bpd drop in U.S. gasoline consumption. Crude is now lower because the recovery of crude production is faster than the recovery of demand. WTI is trading at $40.39 as we write, below our $42-per-barrel benchmark.

Crude traders are focused on the demand numbers now. The EIA data on crude and refined fuels inventory showed higher-than-expected drops, but traders shrugged it off. These latest developments for both propane and crude fundamentals should put us on the sideline as buyers. We want to see some turn higher first. Then we will look for some changes in fundamentals that support a return of the higher price trend before buying at this point.

For now, we will leave our benchmark prices at 50 cents per gallon for Mont Belvieu LST and $42 per barrel for WTI crude, but for the first time in a while, we now have to consider a potential drop.

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