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Crude demand expected to recover by 2022
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In an opinion piece last week, investment bank Goldman Sachs said it believes that global crude demand will not be back to pre-pandemic levels until 2022. Demand is expected to decline 8 percent this year, increase 6 percent next year and fully recover in 2022. This is important information in analyzing and forecasting propane supply, demand and future pricing. We have strongly made the point in recent Trader’s Corners that propane supply is driven by economics for crude and natural gas production.

It appears that propane supply has been more adversely affected by COVID-19 than demand. It is our contention that people staying at home during sequestering didn’t harm propane demand as much as it did crude and natural gas demand. The argument is that more homes and relatively fewer industries and businesses use propane for fuel. Most of the demand destruction would come from petrochemicals due to slower economic activity. But a lot of new propane dehydrogenation plants have helped keep petrochemical demand up, and we think petrochemicals have been using the low cost of propane to their advantage.

U.S. domestic production of propane has been recovering in recent weeks. Production fell to 1.932 million barrels per day (bpd) six weeks ago but has been on the rise since. It hit 2.230 million bpd last week, up 298,000 bpd from the low. That is still 234,000 bpd less than the high at the beginning of the year. If Goldman Sachs is correct on when demand will be back to normal, we might assume a similar time frame before crude, natural gas and propane supplies will be back to their pre-pandemic levels.

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Image: Otodata
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Chart: Cost Management Solutions
Chart: Cost Management Solutions. Click to expand.
One good way of monitoring overall energy demand is to watch total petroleum products supplied (TPPS). That information is provided by the Energy Information Administration each Wednesday.

TPPS essentially shows all demand from all products made from a barrel of crude. This helps us remove some of the seasonality impacts when looking at a single petroleum product.

On March 1, before the full impacts of sequestering to slow the spread of COVID-19 were felt, TPPS was at 21.875 million bpd, setting a new five-year high for that time of year. The U.S. economy was robust with nearly full employment. The unemployment rate was 3.5 percent. The Commerce Department just released June unemployment at 11.1 percent, down from 13.3 percent in May.
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TPPS fell to 13.797 million bpd by the second week in April. Since then, TPPS is up 3.556 million bpd but is still 4.522 million bpd less than the high for the year. TPPS is now at 79.3 percent of where it was before COVID-19. Since all of these products come from refining crude, it is easy to deduce the real demand for crude is still more than 20 percent below what it was pre-pandemic. Remember, less overall demand for crude is going to result in lower crude production and refining rates, yielding lower U.S. propane production.

U.S. propane demand is down since March, but you would expect that to be the case due to the seasonal nature of propane demand. Therefore, it is hard to really measure how much COVID-19 has impacted propane demand. The best comparison we can make is to look at domestic demand from March 1 through June last year and compare to this year. U.S. domestic demand is actually up 168,000 bpd year-over-year during that time frame. This certainly supports our case that COVID-19 is having greater negative impacts on U.S. propane supply than propane demand.
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Exports are the other big portion of propane demand. COVID-19 does appear to have impacted exports since they are down 53,000 bpd March through June this year compared to last year. Combined with domestic demand, we are still looking at a net gain in propane demand of 115,000 bpd. At a time when overall demand for petroleum products has been sharply lower, and thus crude production and refining is down, yielding less propane supply overall, propane demand is up.

With this analysis, it is easy to see why propane prices recovered from around 20.75 cents on March 23 to 52.25 cents on June 23. Since then, propane prices have dipped a little as the traders have seen propane production increase. But if the full recovery in crude demand is more than a year away, as Goldman Sachs believes, the foundation for tighter propane supply and potentially higher prices remains.
About Cost Management Solutions
Cost Management Solutions LLC (CMS) is a firm dedicated to the analysis of the energy markets for the propane marketplace. Since we are not a supplier of propane, you can be assured our focus is to provide an unbiased analysis.
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