Fuel & Freight Update | COVID-19 Improvements Lead To Slow Market Recovery

ENERGY MARKET

Wholesale diesel prices have staged a tentative comeback since bottoming out at $1.32 per gallon on April 28. This newfound price stability is tied to energy demand slowly returning because countries around the world have started lifting COVID-19 coronavirus lockdown restrictions. Meanwhile, crude oil and refined product supply continues to tighten from voluntary and involuntary production cuts. The gradual restoration of market balance has pushed benchmark WTI crude oil prices above $30 per barrel for the first time since mid-March. Similarly, national wholesale diesel prices have increased to their highest levels in about a month at around $1.60 per gallon. The gap between the DOE retail index and the wholesale market remains remarkably wide.

The global outlook mildly improved after demand showed a bit more strength than what was previously projected. The slow return to normal encouraged the International Energy Agency (IEA) and other outlets to boost Q2 demand forecasts in their most recent report. However, the IEA still expects year-over-year consumption to fall about 20 percent this quarter. The agency also estimates a slight demand boost in 2020 on average, albeit still thinks consumption is on track for an annual decline of 9 percent. Demand improvements come simultaneously with world production that is on track to dip to its lowest level in nine years. The OPEC+ alliance is leading this charge after the imposition of its record production cuts on May 1, while supply restraints outside the OPEC+ group have materialized quicker than anticipated. Ongoing supply adjustments and the progressive re-opening of economies will see the supply-demand gap narrow in the months ahead. This will support wholesale diesel prices through the second half of 2020 and into 2021. The energy market’s path to a full-blown recovery, however, will be long, uncertain, and heavily dependent on the longevity of COVID-19.

FREIGHT MARKET

Freight demand in the Breakthrough Network maintained strength in April despite numerous industry reports of opposite behavior. Breakthrough’s freight demand stability is mainly attributed to sustained demand for nondurable goods, regardless of the economic upheaval.

The labor market’s health and consumer sentiment are key freight demand indicators. Regions with the highest freight demand in March trended with COVID-19 cases but have recently trended more in line with jobless claims.  The more populous states with a relatively low number of jobless claims since March 15 as a percentage of the state’s labor force—including Texas, New York, Florida, Illinois, and Ohio—saw higher freight demand.

As economies start to reopen, consumer sentiment will be another key metric to track.  By June, nearly every state will make significant progress toward reopening nonessential businesses and limitations on the size of public gatherings will be reduced. The mood of consumers in a less-regulated environment will drive the summer freight market. Current trends in freight demand will linger as consumers remain reluctant to change behavior despite restrictions being lifted.

View our past market updates in response to COVID-19 and recent OPEC+ dynamics below:

• 5.11.2020  | Market Responds to a Tentative COVID-19 Recovery
• 5.4.2020   | Shifting Dynamics Leave Markets Volatile
• 4.27.2020 | Market Turmoil Persists on COVID-19’s Dominance
• 4.20.2020 | Oil Prices Go Negative on Consequences of COVID-19’s Demand Hit
• 4.13.2020 | OPEC+ Agrees to Cuts, COVID-19 Retains Market Influence
• 4.6.2020   | Market Evolution Continues with COVID-19 Persistence