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Coronavirus Effect: Oil Inventory Surges, Gasoline Demand Tanks

Nilanjan Choudhury

Oil inventories showed a record weekly build, stoking investor worries of a global supply glut. Further, gasoline demand deteriorated big time on account of lower pump sales due to the coronavirus lockdown. While U.S. crude futures were still up $1.46, or 6.2%, to $25.09 a barrel – primarily due to a rapid decline in domestic production and expectations of output cut by major exporters – there are just too many bearish flags to ignore

Oil Prices Collapse

The oil market is struggling and there is no denying that fundamentals remain firmly bearish. It's been a catastrophic year so far for crude oil, which has suffered a dramatic 60% collapse due to a massive supply glut. The price plunge has wreaked havoc on the industry claiming thousands of jobs, pushing the debt-heavy companies toward default and causing a steep drop in stock prices.

Let’s see why.

The fast-spreading novel coronavirus outbreak has triggered an unprecedented selloff in the commodity. In particular, with major cities under lockdown and travel restrictions in place, the consumption for crude is set to drop substantially. Global efforts to combat the pandemic’s impact and rev up economic activity have largely failed so far. The virus-inflicted demand slowdown has led to hefty oil selloff.

Pressure in the oil markets has been exacerbated by the no-holds-barred price war between Saudi Arabia and Russia. The carnage deepened after Saudi Arabia (the OPEC cartel’s biggest producer and exporter) and Russia (leader of the non-OPEC contingent) failed to agree on additional production cuts to boost oil market fundamentals and prop up prices. Subsequently, both countries decided to open the production floodgates, which combined with the demand destruction to send prices into a tailspin.

In a nutshell, it's basically too much supply but too little demand.

The carnage sent most energy companies scurrying for cover. Even the ‘Big Oil’ companies don’t seem to be immune to this price crash. Supermajors ExxonMobil XOM, Royal Dutch Shell RDS.A and Chevron CVX have all announced steps to "rationalize" their planned capital spending for the current year in response to the sudden oil price slump. The majors, while suspending share buyback programs, intend to generate sufficient free cash flow to maintain the dividend payouts, thereby preserving shareholder values.

U.S. shale producers have been the biggest casualties, with the likes of Diamondback Energy FANG, Concho Resources CXO, Parsley Energy, among others, lowering their 2020 capital expenditure target to contend with depleted oil prices. Some E&P operators like Occidental OXY - carrying a Zacks Rank #3 (Hold) - slashed its dividend payout, while Whiting Petroleum WLL recently filed for bankruptcy.   

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The latest figures from the EIA, which point to an oversupplied oil market, has added to the turmoil.

Analyzing the Latest EIA Report

The U.S. Energy Department's latest inventory release revealed an eleventh straight weekly increase in stockpiles, while gasoline inventories rose sharply too.

Below we review the EIA's Weekly Petroleum Status Report for the week ending Apr 3.

Crude Oil: The federal government’s EIA report revealed that crude inventories surged by 15.2 million barrels – the largest weekly build ever - compared to the 8.4 million barrels increase that energy analysts had expected. A slump in refinery runs, coupled with a sharp pullback in production, both tied to evaporating demand associated with pandemic, primarily drove the record stockpile build with the world's biggest oil consumer. This puts the total domestic stocks at 484.4 million barrels – 6.1% above the year-ago figure and 2% over the five-year average.

The latest report also showed that supplies at the Cushing terminal in Oklahoma (the key delivery hub for U.S. crude futures traded on the New York Mercantile Exchange) was up 6.4 million barrels – the most of all time - to 49.2 million barrels.

The crude supply cover was up from 30.1 days in the previous week to 32.2 days. In the year-ago period, the supply cover was 28.5 days.

Let’s turn to products now.

Gasoline: Gasoline supplies tallied a massive increase for the second week in a row. The fuel’s 10.5 million barrels jump is attributable to the drying up of demand from the coronavirus-induced economic shutdown. Analysts had forecast 5.4 million barrels build. At 257.3 million barrels, the current stock of the most widely used petroleum product is 12.3% higher than the year-earlier level and is 10% above the five-year average range. In fact, disruptions by the pandemic’s effects depressed the products’ consumption by 1.6 million barrels last week to 5.1 million barrels per day – a record low.

With the EIA numbers starting to reflect the demand destruction caused by the contagion, market watchers believe that consumption is set to shrink further (in April and May) and the worst is still to come for the oil markets. Independent analysts say that motor fuel demand is set to take a severe hit as coronavirus forces more people to work remotely and observe social distancing. In fact, prices at the pump are collapsing, with a gallon of gasoline at some U.S. states averaging less than $1. While this might be the best time in two decades to plan a road trip, there is hardly any rush to take advantage amid the coronavirus shutdown.

Distillate: Distillate fuel supplies (including diesel and heating oil) edged up after falling for eleven consecutive weeks. The 476,000 barrels increase could be attributed to lower demand. Meanwhile, the market had been looking for a supply draw of 500,000 barrels. Current supplies – at 122.7 million barrels – are 4.2% lower than the year-ago level and remain 12% below the five-year average.

Refinery Rates: Refinery utilization was down 6.7% from the prior week to 75.6%,  the lowest since September 2008.

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