Market Summary: February 28, 2021

Declining inventories in the aftermath of the previous week’s deep freeze, now referred to as winter storm Uri, as well as continued reductions in global stocks and a measurable decline nationally in Covid-19 cases were among the key drivers that propelled petroleum prices to 13 month highs midweek. A stronger dollar, a likely OPEC+ supply boost at their meeting scheduled for March 3rd and 4th, profit taking, refined product and Brent expiries and technical signals indicating petroleum contracts as severely overbought led to a softening of prices at week’s end. On the week, WTI prices gained 3.8%, Brent 5.1%, RBOB 3.8% and ULSD 1.8%. Total US commercial petroleum inventories fell by 13.8 MB. Refinery utilization rates fell to their lowest levels in 12 years as an estimated 4 MBPD of refining capacity is still offline and an estimated total of 40 MB of production was not brought to market as a result of the freeze.

Soaring bond yields and increasing inflation concerns fueled in part by the Congress’ passage of a 1.9 trillion USD stimulus bill pushed equity indexes lower. On the week, the Dow fell 1.8%, the S&P 2.4% and the Nasdaq 4.9%. The dollar index tested three week highs after recovering from six week lows on Wednesday to settle at 90.93. Gold prices fell sharply, settling at $1,728.80 to close at their lowest level since June of 2020.

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The freeze in Texas resulted in the largest weekly decline in refinery utilization since Hurricane Harvey, dropping by 15%. Texas has 32% of national refining capacity, more than half of which was lost in the immediate aftermath of the storm. 31% of national capacity (some outside of Texas, primarily in the mid-west) was offline. At the time of this writing, approximately 20% of national refining capacity is still shut in. The freeze also resulted in the loss of roughly 50% of the state’s Natural Gas production.

Four US based banks have issued statements suggesting that, under specific circumstances, the price of Crude could reach $100 per barrel by the end of 2022. To that end, a significant increase in trading activity on December 2022 $100 calls has occurred in the past week.

Estimates for an OPEC+ production increase at the group’s March 3-4 meeting range from a low of 500 KBPD to as high as 2.25 MBPD. Saudi Arabia’s unilateral reduction of 1 MBPD, scheduled to expire at the end of March, could be curtailed or extended depending on their response to a likely strong request from Russia to increase production, perhaps significantly, as global prices now far exceed their targets of $45 to $50 per barrel. Russian output currently stands at 10.09 MBPD, more than 1.3 MBPD below their maximum production capacity.

Chinese Crude storage levels are now at or near historic highs, estimated at 1.1 billion barrels. The Chinese SPR has been at its maximum capacity of 380 MB since October 2020. Refinery expansion and generous import quotas should result in continued increases in Chinese Crude demand.

Mixed signals continue from the current US administration as bombing strikes were ordered on Iranian backed rebels in Syria this week even though it is the stated plan of the US to try to return to direct discussions with the Iranian government regarding their ongoing and apparently expanding nuclear activity.

US Crude inventories increased for the first week in five, rising by 1.285 MB. Crude stocks remain at their five-year average and are 19.7 MB above levels of last year at this time. The price of WTI gained $2.26 on the week. Inventories in the three PADDs affected by trans-Atlantic trade gained by 249 KB. A reduction in PADD 3, the US Gulf coast, of 2.510 MB was largely the result of reduced pipeline flows into refineries closed by the freeze. The source of a number of these supplies, the NYMEX delivery point of Cushing Oklahoma, saw stocks rise for the first week in six, increasing by 2.807 MB, the largest weekly gain since April 2020. Inventories in PADD 2, the Midwest, which encompasses Cushing saw inventories increase by 4.492 MB largely for the same reason. The weather also caused imports of Crude to fall by 1.299 MB to a level of 4.599 MB, the lowest level of imports since February 1996. Domestic production of Crude fell by 1.1 MBPD to a level of 9.7 MBPD, the largest weekly drop since last August. Refinery utilization fell by 15% to 68.6% of capacity, its lowest level since 2008 and Crude runs fell by 2.589 MBPD, the largest weekly decline since August 2017. Utilization in PADD 3 which encompasses Texas was at 86.5% before the freeze. It is now at 62.8%. Finally, imports fell by 1.5 MBPD to well below their five-year average. A key view of many analysts is that Crude production will recover at a slower rate than refinery utilization. Given this, we expect Crude stocks to fall in the coming week by 1.0 to 1.5 MB.

US Gasoline inventories increased for a fifth consecutive week, rising by a paltry 12 KB. US Gasoline stocks are now 1% over their five-year average and 700 KB above levels of last year at this time. The price of RBOB gained by 701 points on the week. Inventories in the three PADDs affected by trans-Atlantic trade gained by 253 KB. The gain was most pronounced in PADD 3, the US Gulf coast, where stocks increased by 804 KB due to a severe drop in demand linked to the freeze. National demand fell by 1.2 MBPD, the largest weekly drop since March 2020. Inventories in the PADD 1 subsection that encompasses New York Harbor, the Nymex delivery point, increased substantially, rising by 1.039 MB. This occurred despite a significant reduction in imports of 139 KBPD to a level of 531 KBPD. Shipping data indicates a likely reversal of this next week. We expect imports to recover all of this week’s reductions and then some. Gasoline production fell for the first week in three, dropping well below its five-year low, falling by 1.295 MPBD to a level of 7.736 MBPD. With a likely increase in production and imports and an increase in demand, we expect Gasoline inventories to be within 500 KB of unchanged in the coming week.

US Distillate inventories fell for a fifth consecutive week, falling by 4.969 MB. Distillate stocks are now 3% above their five-year average and are 24.2 MB above levels of last year at this time. The price of ULSD gained 336 points on the week. Inventories in the three PADDs affected by trans-Atlantic trade fell by 5.111 MB. The drop was most pronounced in PADD 1, the US Atlantic, where stocks fell by 4.395 MB. The freeze in Texas was quite rare, while northeastern winters are quite common. Overall national demand did fall by 522 KB. Production fell by 953 KBPD and is now well below its five year low. We expect an increase in demand, a small increase in production and exports, which fell to 889 KBPD, to remain low. We expect Distillate stocks to fall by 2.5 to 3.0 MB in the week ahead as a consequence.

The OPEC+ meeting will have a large impact on outright market direction. Saudi Arabia, with the added strength of their 1 MBPD unilateral reduction in output in play in the days ahead, could well limit any pressure Russia might bring to bear by increasing production further. Iran could further increase production in ongoing defiance of the US as mixed signals from the current administration continue. In the short term at least, cracks should continue to increase until refineries are operating at higher than 80% of capacity, in all likelihood something that is another week or two away. The weight of an expanding RVO value, due in large part to an almost adversarial posture against the refining industry by the current administration, could serve to some degree to limit utilization expansion, thus enabling cracks to widen further as Nymex values do not reflect the RVO burden to refineries.