Fuel Supply Networks are Responding Properly

Dean Foreman
Posted March 26, 2020

Supply networks for refined products – including gasoline, diesel and jet fuel – appear to be responding properly and flexibly to sudden and sharp declines for transportation fuel stemming from the coronavirus (COVID-19) and global efforts to slow its spread.

Market conditions can shift, yet API’s view at this point is that most refined products markets have continued to function well in keeping about a month’s worth of storage.

We gauge this in part by comparing recent inventory levels for gasoline, diesel and jet fuel with their ranges over the past five years. Although some products appear to have more available storage capacity than others, if needed, it also is apparent that the pace at which refiners produce fuels can provide additional adjustments which will affect demand for storage.

This is encouraging, given reduced transportation fuel demand due to COVID-19 as well as some concerns about potential panic buying that called into question whether gasoline supplies in some states would remain available and fuel deliveries sufficient as the virus spread.

One unforeseen result of the decline in gasoline demand is potential disruption to the annual springtime transition to lower RVP (Reid vapor pressure) gasoline. This occurs every spring as refiners meet more stringent RVP gasoline requirements that phase-in during February to June.

Refiners began manufacturing lower RVP fuel, but it may become stranded due to reduced fuel demand.  These requirements and logistical constraints could complicate gasoline storage as storage tanks need to completely turn over inventory of higher RVP gasoline and make room for lower RVP gasoline. Industry is seeking regulatory flexibility through waivers to accommodate this seasonal change.

Another concern this quarter was implementation of IMO 2020 which, as API highlighted in its Industry Outlook, was expected to spur a large shift from residual fuel oil to low sulfur distillates/diesel that had potential to impact prices for heating oil and ultra-low sulfur diesel fuel. Again, refined product markets seem to be working and responding appropriately to consumer needs.

Starting with the current big picture, as detailed in API’s latest Monthly Statistical Report (MSR), total U.S. petroleum inventories, including crude oil and refined products but excluding the Strategic Petroleum Reserve, were 1.3 billion barrels in February – on par with last year’s average and in the middle of the five-year range. On the surface, this shows capacity for additional storage, but notice that over the past 16 months (pre-COVID-19) there was consistent stock building compared to the same month in the prior year.

Let’s examine this trend by fuel type.

Motor gasoline – Among U.S. refined products, gasoline stocks are the single largest product with nearly 254 million barrels in inventory as of February 2020, which was within 2.25 million barrels below the five-year maximum.

By comparison, the U.S. Energy Information Administration (EIA) reported gasoline stocks of 241 million barrels as of March 13. By EIA estimates, this equated to 25.8 days of U.S. gasoline consumption in inventory nationwide as of March 13, slightly below average for the month of March. 

Together these data suggest that the typical seasonal trend of motor gasoline stock draws remained intact through mid-March, and as we observed in the MSR, there was fuel substitution where many consumers drove instead of flying in February. 

The EIA’s reported drawdown in U.S. gasoline stocks also tells us there is room to accommodate more than 20 million barrels of additional gasoline to reach the highest storage level seen for any month over the past five years.

At the same time, local concerns about gasoline delivery appear to have shown continued availability in metropolitan areas that have been the most affected so far by COVID-19. These maps for New York City and San Francisco from Gasbuddy.com show stores remain open for business and are providing products to consumers.

Diesel/Distillates – Despite the fact that a U.S. trucking recession contributed to distillate demand in February being at its lowest level for the month since 2010, diesel/distillate stocks have not accumulated. 

Critically, U.S. distillate production, which decreased 2.0% y/y in February and was below year-ago levels for 11 consecutive months, responded to demand and avoided an uneconomic accumulation of inventories. 

In February, U.S distillate stocks were 0.7% below those of February 2019 and 6.6% below the five-year average.  By EIA estimates, U.S. distillate stocks continued to fall as of March 13 and were equivalent to 30.4 days of consumption.

Jet fuel – Largely before the sudden demand decline in the U.S. due to COVID-19, kerosene-type jet fuel stocks neared their highest levels over the past five years.

In six of the past eight years, jet fuel stocks rose between January and February, but that was not the case in February 2020. The reason was that jet fuel production by refiners also decreased by 10% between January and February, which was the largest decrease for the month on record since 1981.  This suggests that U.S. refiners were keenly aware of evolving market conditions. EIA reports that jet fuel stocks continued to fall through March 13 to 40.7 million barrels, equivalent to 25.2 days of supply, which is about one day fewer than is typical for March, based on EIA data since 1991.

In closing, the extent of the prospective demand decreases remains uncertain with COVID-19. For all three products – gasoline, distillate and jet fuel – a common thread is that the stocks turn over relatively quickly under normal circumstances with 25 to 30 days of supply in storage. Compared with the highest storage levels over the past five years, all three products have remaining capacity, though changing the winter-grade gasoline in the tanks to summer-grade gasoline could be challenging. Additionally, with airlines announcing drastic flight reductions, the storage for jet fuel could become a new challenge, for which the industry is preparing.

However, with state and federal agencies providing regulatory flexibility to accommodate the slower-than-normal turnover in the gasoline tanks – and also with refiners adjusting their production to respond to reductions in historical consumer demand – indications so far are that deliveries have continued and fuels remain available.  Consequently, markets have responded to unprecedented events.