Market Summary: March 14, 2021

Crude prices eased at week’s end after reaching their highest levels since January 2020 on Wednesday. This was the first week in three that Crude prices fell. Refined product prices continue to increase, particularly Gasoline, as the market is still recovering from the aftereffects of the Texas freeze. On the week, WTI fell 0.7% and Brent 0.2% while Gasoline gained 4.1% and ULSD 1.2%. Crude stocks grew and refined product stocks fell, both substantially. An increase in refinery utilization this week of 13%, the largest weekly gain ever, is expected to continue over the next few weeks until utilization levels have returned to seasonal norms as Gasoline cracks have reached 3½ year highs. There is a growing sense that the OPEC+ output level will increase in the next month should prices remain high thus encouraging participants to seek to sell excess production capacity.

An increase in bond yields eased inflation concerns, at least temporarily, enabling equity indexes to rise. On the week, the Dow gained 4.1%, the S&P 2.6% and the NASDAQ 3.1%. For similar reasons, the dollar index eased slightly, dropping by 0.33 on the week to settle at 91.66. Gold prices, possibly influenced by ongoing attempts to destabilize the Saudi government with continued attacks from Iranian-backed Houthi rebels in Yemen, increased by more than $27 per ounce to settle at $1,725.80.

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The key feature of the week was the ongoing surge in Gasoline cracks amid shrinking inventories as well as due to increasing renewable fuel credit costs. According to a major industry analyst, 40% of the gains in the Gasoline crack are linked to increasing biofuel costs as RVOs, the renewable volume obligation cost, accounts for nearly $0.17 a barrel or 6% of the retail gas price. RVOs are at historic highs since tracking such prices began in 2013. US Gasoline stocks are at four-month lows and have experienced their largest two week drop on record. Gasoline demand increased by 7% on the week, reaching its highest levels since November 2020. The commitment of trader’s report released this week does however show a reduction in speculative length in Gasoline which could result in a significant correction as a number of technical indicators show a market quite overbought.

OPEC’s monthly report issued this week showed an increase in their estimate of demand growth in the second half of 2021 to a level of 96.27 MBPD. The report also projected non-OPEC production growth at 1 MBPD for 2021. The US government-based EIA issued a report citing current global production at 93.6 MBPD with overall demand for 2021 at 96.7 MBPD.

'It was reported this week that China has been buying increasingly significant volumes of Iranian Crude. Shipping data indicates the current flow from Iran to China is more than 850 KBPD. Iran is achieving such export levels through ship to ship transfers and the shutdown of transponders on ships to avoid detection. The increase in Iranian flows has occurred amid diminishing concerns over any recrimination with sanctions from the current US administration.

US Crude inventories increased for a third consecutive week and third in seven, rising by 13.798 MB. US Crude stocks are now 6% over their five-year average and 46.6 MB above levels of last year at this time. The price of WTI fell by $0.48 on the week. Inventories in the three PADDs affected by trans-Atlantic trade gained by 13.421 MB. The gain was again most pronounced in PADD 3, the US Gulf Coast, where stocks rose by 15.187 MB. This occurred despite a significant rise in refinery utilization as stated earlier of 13%, the largest weekly increase ever. Inventories at the Nymex delivery point of Cushing Oklahoma gained for a third week in a row, rising by 526 KB. Cushing inventories are now slightly above their five-year average and are likely to approach levels of near unchanged in the coming weeks as utilization rates continue to increase. US exports, though relatively low, rose slightly and now stand at 2.6 MBPD. Domestic production increased by 900 KBPD to a level of 10.9 MBPD. We expect production to continue to increase given the OPEC+ production stance. In the week ahead, we also see an increase in utilization. As a consequence, any further gains in Crude inventories should be limited. We expect Crude stocks to increase by 2.5 to 3.0 MB in the coming week.

US Gasoline inventories fell for a second consecutive week, dropping by 11.869 MB. Gasoline stocks are now 6% below their five-year average and are 15.4 MB below levels of last year at this time. The price of RBOB gained 805 points on the week. Inventories in the three PADDs affected by trans-Atlantic trade fell by 11.343 MB. The reduction was most pronounced in PADD 1, the US Atlantic, where stocks fell by 7.493 MB. Inventories in the PADD 1 subsection that encompasses New York Harbor also fell, dropping by 1.626 MB amid slightly lower import flows which fell by 28 KBPD to a level of 577 KBPD. The increase in demand was significant, rising by 578 KBPD on the week and leading to a four-week rolling average demand level of more than 8 MBPD, the first time this has happened since November. Gasoline production did recover strongly, increasing by 704 KBPD. The average price at the pump on a seasonally adjusted basis is now at a five-year high. The last time the national average price at the pump exceeded three dollars per gallon was in October 2014. Expectations for increased demand due to the dwindling effects of Covid-19 are countered by concerns of price driven demand destruction. We expect demand to stabilize at or near current levels. Gasoline stocks should fall next week but by a much smaller amount. We project Gasoline stocks to decrease by 2.0 to 2.5 MB in the week ahead.

US Distillate inventories fell for a seventh consecutive week, dropping by 5.504 MB. Distillate stocks are now 4% below their five-year average and 9.4 MB above levels of last year at this time. The price of ULSD gained 235 points on the week. Inventories in the three PADDs affected by trans-Atlantic trade fell by 4.993 MB. The reduction was most pronounced in PADD 1, the US Atlantic coast, where stocks fell by 3.187 MB. The weekly increase in demand of 699 KBPD was due in part to remnant thermal needs in the Northeast that led to such reductions. Shipping data indicates a reduced flow of exports to continue. Exports this past week fell to near 500 KBPD, a figure below the five-year low. Given limited exports, diminishing thermal needs and another likely increase in production, we believe Distillate inventories will be within 500 KB of unchanged in the coming week.

We expect production and utilization rates in the US to increase in the week ahead. We further expect Gasoline demand to be restrained by rising prices, as cited above. It is becoming increasingly obvious that OPEC+ has overtightened supplies. Total US petroleum stocks have fallen by 168 MB since July. Total OECD stocks have fallen by 284 MB in the same period. As stated earlier, a number of technical studies indicate the market as being significantly overbought. This, coupled with diminishing speculative length may lead to a downward price correction, possibly significant, in the near term.