CHICAGO — As of March 19, the number of confirmed cases of COVID-19 in the United States had breached 10,000. Many of the hardest-hit states have imposed a range of restrictions on commerce and travel to enforce social distancing, including closing in-person dining at restaurants and announcing shelter-in-place orders. With many businesses throttled, unemployment claims have jumped by 70,000 in the space of a week, according to the U.S. Department of Labor.
Meanwhile, Saudi Arabia and Russia are engaged in a price war, which has helped pressure crude prices below the $25-per-barrel mark. In the United States, gasoline prices are beginning their inevitable decline, with the retail average for regular grade falling below $2 per gallon in 19 states and counting, according to GasBuddy, Boston.
Patrick De Haan, the Chicago-based head of petroleum analysis for GasBuddy, spoke with CSP Daily News about his expectations for fuel prices and demand, the outlook for oil prices, what makes forecasting right now so difficult and the silver lining for convenience stores. What follows is an edited version of our conversation.
We saw one of the first gas stations to price gasoline at 99 cents per gallon this week. How many markets will reach this point in the next week or next month?
It’s an anomaly this early; it wouldn’t surprise me in next week or two to see stations whittle down. Not many stations like to shoot themselves in the foot, basically halving their margin so quickly, so significantly. But it wouldn’t be a surprise if we saw a handful at 99 cents. I wouldn’t be surprised to see one in Texas, Oklahoma, perhaps more here in the Great Lakes. Whether or not it sticks, and for how long, that’s a better question. Oil prices were up a little today [March 20], but who knows if will go down tomorrow.
It’s basically guaranteed at this point [next week] we will drop under $2 nationally. Unless Saudi Arabia or Russia start to think more about oil production cuts, I think we’re probably headed to a place for a national average that will rival the 2016 low of $1.66 and certainly could rival the low of $1.59 we saw during the recession. If we get to $1.58 as the national average, which is in the realm of possibility—maybe 25% odds—then we’d be at the lowest since 2004, and that would be pretty monumental.
Will we see the pace of price declines pick up as fuel demand drops?
As the herd thins out in terms of vehicle volume, [gas stations] may get a little bit more desperate and try to utilize their wide margins to bring in more traffic. But I don’t see it happening widespread; there is a lot of uncertainty for stations as well, and the margin is giving them some certainty going into this situation that could help keep their doors open a little bit longer.
Will the pace pick up? Stations are always hesitant to pass a price decrease along too quickly, mindful that things could shoot right back up. But we’re at a point right now where stations are probably feeling more comfortable that this drop will stick around, so it wouldn’t surprise me if the pace accelerated slightly. But there’s a fine line, too—they don’t want to shoot themselves in the foot by going too quickly and introducing a price war.
With social distancing and the increased number of layoffs, what are you seeing currently in terms of fuel demand?
Government data this week showed a surge in demand to 9.7 million barrels per day. When you think about it, it’s not too surprising ahead of what could become a major pandemic in the U.S., with people staying home. There’s a lot of fear: Just like we’re seeing a run on toilet paper … people are probably filling their tanks up, just not knowing what lies ahead. So it wouldn’t surprise me to see a surge in demand.
But next week should see a pretty noteworthy decline. The cliff is around the corner—we can’t see it yet, but we have very strong evidence to believe there will be a cliff. Ultimately, gasoline demand could drop to 7 or 6 million barrels per day. How deep the wound is will depend on how much of a lockdown we go to. But it’s within the realm of possibility that gasoline demand could be cut in half compared to summer volume, so we could be talking about 5 to 6 million barrels as the more extreme.
How challenging has it been to forecast where the market is heading during these times?
The infection rate: That’s what I’m looking at. We’ve never seen anything in my lifetime, in the modern day so infectious. Do numbers triple tomorrow and then is Chicago or Illinois shut down? Does President Trump literally close the skies, shut down the trains, everything? Or do we have drive-thru testing suddenly tomorrow? Everyone’s getting tested, everyone’s got a shelter in place [order], and do things get better?
I really have no idea for how this is going to go. Gasoline demand is so much tied to the overall economy that authorities are now … on a whim blocking portions from functioning as normal. That’s what’s so difficult to guess: what their next move may be to stop the spread of the coronavirus.
Say Saudi Arabia and Russia end their price war. How could this play out with oil prices?
Just like a gas price war, no one wants to be the first one to flinch, especially when it comes to these very significant oil producers. If they do—they can’t continue forever—oil prices will rally on the news. Theoretically, I could see oil prices shoot up by maybe $7, $8, $10 per barrel.
But we’d have to look at the details. Are they cutting today? Because anything beyond that, if they wait a month, that’s a sizable delay. You’ll have an incredible disconnect between supply and demand at that point.
Even if it is [today], I could see the market rallying significantly the day it happens and then going down the next because the coronavirus hasn’t gone away. Unless it’s a massive cut of several million barrels, there’s still a chance they’re still essentially going to be flooding the market.
President Trump has ordered the Department of Energy to fill the Strategic Petroleum Reserve to its maximum capacity. How will that affect oil prices?
It’s a powerful tool. Absolutely, fill it up. It’s the perfect time. This is like the companies who want to do buybacks—that’s a dream to buy back shares at a 52-week low, and now you have oil prices at an 18-year low.
I don’t think it will be enough to drive oil prices one way or another—maybe a dollar a barrel. But the market is so obsessed over the long term—which is the loss of millions of barrels per day in demand—that the U.S. filling up 50 [million] to 60 million barrels is not going to make much of a monumental shift.
What else we should consider about this unprecedented time for the industry and the country?
A lot of c-stores are now the lifeline. Grocery stores are overrun. They’re huge, people are afraid they’ll catch coronavirus. If this was the 1980s or 1990s, c-stores didn’t have the options they do today. So it has been a paradigm shift it the c-store sector. I have a Shell down the street—it has bread, eggs, milk—all the essentials. It’s been a dramatic turnaround and c-stores are very well-positioned to help America weather the storm.