Fuel Markets in the Time of COVID-19

Demand destruction and low prices are the new norms for 2020
Photographs: Shutterstock

ROCKVILLE, Md. — Unprecedented. Generational. When it comes to the forces shaping fuel markets in 2020, no one adjective does it justice.

“These phrases during similar circumstances may have represented some hyperbole, but not this time. This is really different,” said Denton Cinquegrana, chief oil analyst with Oil Price Information Service (OPIS), Rockville, Md., in his fuel market forecast for the 2020 NACS State of the Industry Virtual Summit.

“Never before have we seen a supply shock and a demand shock at the same time, and we’re seeing some real ramifications from that,” Cinquegrana said. On the supply side, he pointed to the effect of the oil-price war between Saudi Arabia and Russia, which has pushed oil prices down to levels not seen since the beginning of this century. While the Organization of the Petroleum Exporting Countries (OPEC) and its allies have come to an agreement on a production cut to deal with the drop in prices, it can't stabilize them on its own. 

That's because of the global collapse in consumption from shelter-in-place orders and social distancing. Demand is expected to fall by 20 million barrels per day (bpd) in April, and more than 16.4 million bpd in the second quarter, according to OPIS' parent company, IHS Markit. 

“It’s not since the beginning of this century that we’ve seen demand potentially as low as it’s going to be,” Cinquegrana said. “Even if there is a rapid recovery of demand, oil prices won’t go back to January levels until well into next year.”

Demand Destruction

According to OPIS’ DemandPro, an online tool that collects fuel volume data from 15,000 gas stations around the United States, the demand decline began in early March and then quickly accelerated through the second half of the month. Year over year, volumes dipped 2.4% for the week ending March 14; 24.1% for the week ending March 21; and 46% for the week ending March 28. While much of the demand destruction began on the East and West Coasts, it has since become a national phenomenon, following the spread of the coronavirus pandemic.

“There’s a very legitimate chance that gasoline demand will be down 50% year over year,” Cinquegrana said.

The biggest hit to demand has come from people no longer traveling for social and recreational reasons, he said. Before COVID-19, these occasions drove more than 30% of vehicle miles traveled (VMT), according to IHS Markit's analysis of U.S. Bureau of Labor Statistics data. Working commuters’ share of VMT was lopped in half.

For fuel retailers, the one saving grace has been strong fuel margins. According to OPIS, fuel margins for 2020 year to date have been 39.1 cents per gallon (CPG), compared to 24.8 CPG in 2019. The highest margins—and greatest percentage decline in volumes—can be found in the Western United States.

“Obviously, this margin environment won’t last forever … but for the time being, it’s unprecedented, record-breaking, generational,” said Cinquegrana, who expects margins to begin normalizing later in April.

“The huge margins have offset volume loss, but it’s hard to take advantage of these huge margins when demand isn’t there,” he said.

A Future Look

What will the fuel markets look like on the other side of the COVID-19 pandemic?

“There are so many variables that can shape fuel markets over the next 20, 24 months. The greatest variable is time,” Cinquegrana said.

Specifically, when do the state shelter-in-place mandates, which have been the biggest demand killer, finally end? Some states currently have an end-of-April end date for these orders, but others stretch into May. And still other cities and states may adjust their approach depending on local COVID-19 conditions.

“As we see stay-at-home orders lifted, because it will come as a piecemeal type of thing, a tiered approach, if you will—it will keep supplies from tightening quickly and prevent a spike in demand,” Cinquegrana said.

Longer term, some businesses that have had a positive experience with a remote workforce during the shelter in place orders could change how they operate after the pandemic, which has its own demand implications.

“At some point, does that reach a level where stay-at-home orders are lifted and companies say, ‘This working-from-home thing worked out pretty well. We’re going to stick with it’?” Cinquegrana said. Renting office space is an overhead cost, one that some cash-strapped businesses may be quick to cut.

“I can see a scenario where working from home becomes a lot more common after we break out of this, and the telecommuting more popular, and we lose some of that commuting demand we’ve seen in the past,” he said.

The rest of 2020 will likely be shades of these first, chaotic months, and the return to "normal" uneven and uncertain.

“The timeline on this is just still very much unknown,” Cinquegrana said. “We’re going to be in a low-price environment for gasoline and crude oil for quite some time, and a low-demand [environment] for quite some time.”

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