Market Summary: March 21, 2021

Petroleum prices suffered their largest weekly loss since October, falling for six consecutive trading days before recovering slightly on Friday. Driven by a significant recovery in the dollar, Thursday saw the largest single day loss in 11 months. Vaccine issues in Europe leading to renewed lockdowns, 9 MBPD of global spare production capacity, an alarming increase in Iranian exports specifically to China, profit-taking and a simple case of oversupply in a number of key cash markets globally all weighed on prices. On the week, WTI lost 6.4%, Brent 6.8%, RBOB 9.6% and ULSD 7.4%. Total commercial petroleum inventories in the United States gained 3.6 MB on the week. Refinery utilization rates rose significantly, increasing by 7% to 76.1% of capacity as refiners are still recovering from the Texas freeze. The small improvement in prices on Friday was driven in part by reports of Iranian-backed Houthi rebel attacks on oil facilities in Riyadh, Saudi Arabia.

Increasing inflationary concerns, improving bond yields and a change in bank capital assessment methods by the Federal Reserve contributed to weaker equity indexes. On the week, the Dow lost 0.5% and the S&P as well as NASDAQ lost 0.8%. Driven by a sharp increase in value on Thursday, the dollar index settled higher on the week, closing at 91.74. Gold gained $9.20 on the week, a 1.3% gain, rising for the second week in a row to settle at $1,741.70 per ounce.

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Concerns of a risk of clotting from one of the major Covid-19 vaccines led to a suspension of inoculations and a resumption of lockdowns across Europe. More than one third of France’s population is in lockdown with similar restrictions in scattered zones in Italy. News of these lockdowns aided in pressing regional refined product prices lower.

The Paris-based IEA issued its monthly report this week stating that global demand in 2021 is now expected to rise by 100 KBPD to a level of 96.5 MBPD, some 5.5 MBPD higher than 2020 when global demand contracted by what is now estimated to have been 8.7 MBPD. The report cited expected efficiencies in refined product consumption as well as crossover to renewable forms of energy to such an extent that they alluded to the possibility of having reached peak global Gasoline demand. The report went on to state that overall demand will not reach pre-pandemic levels globally until sometime in 2023. The report implied a very relaxed attitude towards pricing as global Crude supplies exceed demand levels by nearly 9 MBPD.

A meeting described as “cold” occurred this week with senior US and Chinese officials. US representatives took China to task over their increasing purchases of Iranian Crude, defying sanctions. The flow of Iranian Crude to China has risen substantially as last year’s average monthly imports of 306 KBPD are now dwarfed in comparison to the 860 KBPD flow in the month of February. Overall Iranian exports have risen 700 KBPD year to date. A full five dollar discount below contract prices is the primary reason for the sharp increase in sales despite the existence of sanctions. It was also reported that Chinese refinery utilization has increased by 15% in the months of January and February 2021 to a level of 14.13 MBPD, a figure now slightly higher than daily utilization rates in the United States.

Though still in full compliance with OPEC+ obligations, Saudi Arabian Crude exports increased for a seventh consecutive month, reaching their highest levels in 11 months after rising by 187 KBPD in the month of February.

US Crude inventories increased for a fourth consecutive week and fourth in eight, rising by 2.396 MB. US Crude stocks are now 7% over their five-year average and 47.1 MB above levels of last year at this time. US Crude inventories have increased by nearly 38 MB over the last three weeks. This was the first week in 2021 that Crude inventories nationally exceeded 500 MB. The price of WTI fell by $4.19 on the week. Inventories in the three PADDs affected by trans-Atlantic trade increased by 3.499 MB. The gain was disproportionately high in PADD 3, the US Gulf Coast, where stocks increased by 5.261 MB. Though recovering, utilization rates in PADD 3, which encompasses Texas, still remain relatively low. Utilization rates did improve by 7% to reach 76.1% of national capacity, still slightly below pre-Texas freeze levels. Inventories at Cushing Oklahoma, the Nymex delivery point, fell by 624 KB, decreasing for the first week in four. This evinces ongoing increases in refinery utilization in parts of PADD 2 that were also affected by the extreme cold. The weight of three weeks of significant growth in supplies, stabilizing utilization rates, somewhat limited export flows which stand at 2.5 MBPD and production which still may improve from its current level of 10.9 MBPD all indicate reasonable price stability in the near term. We do expect Crude inventories to increase slightly in the week ahead, rising by 1.0 to 1.5 MB.

US Gasoline inventories increased for the first week in three, rising by 472 KB. Gasoline stocks are 6% below their five-year average and 8.7 MB below levels of last year at this time. The price of RBOB lost 2069 points on the week. Inventories in the three PADDs affected by trans-Atlantic trade gained by 902 KB. The increase was most pronounced in PADD 3, the US Gulf Coast, where stocks grew by 767 KB amid rising utilization rates. Inventories in the PADD 1 subsection that encompasses New York Harbor, the Nymex delivery point, fell by 1.256 MB. This occurred despite a dramatic increase in Gasoline imports, primarily from northwest Europe, which rose by 333 KBPD to a level of 910 KBPD. Shipping data indicates a slight easing of the flow in the coming week to between 850 and 875 KBPD. On the week, demand for Gasoline fell by 284 KBPD to a level of 8.442 MBPD. We expect demand to soften slightly but still remain over 8 MBPD as exceptionally high pump prices cap emerging demand. Gasoline stocks should again remain within 500 KB of unchanged in the coming week as production and demand achieve some equilibrium.

US Distillate inventories increased for a first week in eight, rising by 255 KB. Distillate stocks are now 4% below their five-year average and are 12.6 MB above levels of last year at this time. The price of ULSD fell 1452 points on the week. Inventories in the three PADDs affected by trans-Atlantic trade gained by 98 KB. The gain was again most pronounced in PADD 3, the US Gulf Coast, where stocks increased by 1.061 MB as utilization rates rose. Remnant thermal needs in the Northeast and Midwest accounted for a 963 KB reduction in inventories. The flow of exports improved with increases in refinery utilization, rising by roughly 200 KBPD to a level of 700 KBPD. Shipping data indicates somewhat similar flows in the week ahead. With expectations of static exports as well as thermal demand and a likely increase in production, we believe that Distillate inventories may fall by 500 KB to 1 MB in the week ahead.

As stated above, US Crude inventories have increased by nearly 38 MB over the last three weeks. Gasoline and Distillate inventories are reasonably proximate to seasonal norms. The high volume of Iranian sales to China will serve to undermine OPEC+ production cohesion at their next meeting at the beginning of April. Outright prices will be influenced by the direction of the dollar, as well as geopolitical issues with Iran, Saudi Arabia and Houthi rebels in Yemen, effectively proxies for Iran. It now appears that expectations for a rapid and robust economic recovery were a bit too much too soon. Unless a geopolitical issue intensifies significantly, we expect outright prices to remain somewhat range bound.