There is a great deal of petroleum product demand destruction taking place, besides what is burned in cars, trucks, trains, and ships…
The U.S. is only in the FIRST STAGE of the country’s oil demand destruction. Since the nationwide shutdown announced by the U.S. Government in mid-March, domestic oil demand has fallen more than 7 million barrels per day. In just the past three weeks, the total U.S. petroleum products supplied to the market fell by 33%.
However, I don’t believe we have seen the low yet in U.S. total oil demand. According to the EIA – U.S. Energy Information Agency, total petroleum products supplied to the market on April 3rd were 14.4 million barrels per day (mbd) compared to 21.5 mbd for March 13th.
FIRST STAGE: Oil Demand Destruction To Peak Within 3-4 weeks
Over the next 3-4 weeks, I see the total U.S. petroleum products supplied to the market falling to the 12 mbd level (or even lower). With 96% of U.S. airline passenger traffic now lost and a 65-75% reduction of domestic vehicle traffic, the data released for April 3rd still haven’t factored in all the demand destruction.
For example, U.S. gasoline supplied to the market is down 48% while Jet fuel is off 56%. When U.S. gasoline supplies fall by 60-75% and Jet fuel down by 80%, then we will likely reach a bottom. However, this doesn’t include other petroleum products such as Propane/Propylene (1.1 mbd) and other oils (3.7 mbd):
As we can see, gasoline supplies fell the most in volume, followed by jet fuel. If we just focus on U.S. gasoline, diesel, and jet fuel, the total products supplied fell 5.8 mbd, or 38%. Diesel supplies are holding up rather well due to the critical transportation via semi-tractors, rail, and ship… all which use diesel fuels.
Unfortunately, there are secondary negative impacts that are now taking place due to the massive drop-off in gasoline demand. U.S. ethanol production has also fallen off a cliff because most gasoline sold in the country is blended with 10% ethanol. So, if there is less gasoline demand, there will be less ethanol needed.
In just the past three weeks, ethanol production in the states has fallen 36%:
During the week of March 13th, U.S. producers were supplying 1,035,000 barrels per day of corn ethanol. However, that has been cut back to only 672,000 barrels per day. I would imagine ethanol production will continue to trend lower, possibly to 500,000-550,000 barrels per day at the low. This has to be destroying corn farmers and ethanol producers LEFT and RIGHT.
And what about the petroleum products that aren’t used for transportation??? What about the millions of barrels of petroleum that are used to make thousands of products, such as PLASTICS and PAINTS, for example?
With the U.S. Automobile Industry at a virtual standstill, how is this impacting the demand for petroleum products?? Good question. Well, according to ROAD & SHOW article, COVID-19 and plant closures: The automotive industry’s response to the pandemic, most of the auto-plants in the country will be shut down for at least a month. So, how much plastic goes in each vehicle today??
In the article, Plastics use in vehicles to grow 75% by 2020, says industry watcher, the typical car will incorporate about 350 kg of plastic, or 772 pounds of plastic. I did some rough calculations and found that about 2.5 pounds of plastic come from a gallon of oil. Thus, each car will consume more than 7 barrels of oil just for the plastic used in each vehicle.
With approximately 1.5 million vehicles not produced in a month due to the shutdown of auto-plants in the United States, that would equate to a loss of 10.5 million barrels of oil. And, this is just one product in the entire supply chain. So, as we can see, there is a great deal of petroleum product demand destruction taking place, besides what is burned in cars, trucks, trains, and ships.
SECOND STAGE: Oil Demand Recovers As Americans Go Back to Work
When the U.S. Government or State Governors announce the “GET BACK TO WORK” policy for Americans, there will be a definite surge in oil demand. How much remains to be seen. But, it will be a considerable surge off the lows as “cabin-fever” Americans head back to work to restaurants-bars, shops, etc. By the end of May and into June, U.S. oil demand will recover, but nothing like it was on March 13th, before the lockdown.
I will be analyzing this situation as it unfolds and will provide my forecasts. However, the SECOND STAGE will set up the market for the THIRD STAGE… the next downturn in oil demand.
THIRD STAGE: Oil Demand Falls Again When The U.S. Economy Heads Into A Prolonged Depression
With U.S. unemployment reaching 15-20%, the longer-term economic impact of the LOCKDOWN will be experienced during the second half of 2020. This is when we head into the THIRD STAGE of oil demand destruction. The THIRD STAGE could take place over a prolonged period.
The U.S. economy will never recover back to the pre-coronavirus level. U.S. GDP of $21.4 trillion in 2019 was the ultimate peak. Of course, if there is massive hyperinflation, we could see a higher GDP figure. But, that won’t be based on real growth.
Americans have no idea just how different the world will look in the next five years. If you don’t own any physical GOLD & SILVER, it would be a wise idea to considering doing so.
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