Market Summary: March 28, 2021

Petroleum prices ended the week mixed, settling near unchanged despite exceptional volatility with broad outright price swings throughout the week. WTI fell 0.7%, Brent gained 0.1% while RBOB gained 1.3% and ULSD lost 0.7%. Total US commercial petroleum inventories gained 4.8 MB on the week. The unexpected blockage of the Suez Canal by a container ship that ran aground which could render this essential route closed to waterborne trade for an indefinite period, the diminishment of increasing demand expectations particularly in Europe due to the stubborn resilience of the Covid-19 virus, emerging expectations that OPEC+ will leave production levels unchanged in April due to slower than expected demand recovery and the continually increasing flow of Iranian output to China in contradiction of sanctions were the key fundamental drivers this week that combined to limit outright price direction.

Despite sharp drops in income and consumer spending, apparent control of inflation, at least for the time being, enabled equity indexes in the US to increase. On the week, the Dow gained 1.4% and the S&P 1.6% while the NASDAQ fell by 0.6%. The dollar index, bolstered by limited inflation as well as comparatively poor economic conditions in Europe due to the resurgence of Covid-19 cases, gained by 0.9% to settle at 92.72. Gold prices fell for the first week in three, dropping by 0.5% to settle at $1,732.30 per ounce.

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The duration of the blockage of the Suez Canal by a large container ship that ran aground on Tuesday remains unclear. A number of maritime analysts have projected periods of time that are quite wide. The Suez Canal authority, to date, has been very noncommittal in predicting any period of time for closure. A salvage company involved in the dredging operations in an attempt to dislodge the ship said it could take weeks. More than 9% of global waterborne trade in petroleum, greater than 5.1 MBPD, passes through the Canal on a daily basis. Backups are starting to impact markets. After five days of Canal closure, both Crude and refined product values in the Eastern Med have risen substantially. As each day passes, the disruptions widen their area of influence. Selected freight rates have skyrocketed upwards as rerouting around the Cape of Good Hope stretches the timelines of round-trip trade routes. As of Friday afternoon, the fourth day of the Canal’s closure, 22 Crude tankers and 23 refined product tankers remained in queue to pass through the Canal. It has been estimated that for every full day of closure, 1.3 days would be required to clear the accumulated backlog of ships.

A significant spike in European Covid-19 cases has resulted in a near nationwide shutdown in Germany that is not expected to end completely until after April 18. One third of France and broad swaths of Italy and Spain also remain under lockdown for an undetermined period of time. Limitations in vaccine supplies as well as logistical issues in distribution have contributed to the spike that has inhibited petroleum demand.

US petroleum demand has continued to return to a level of pre-Covid-19 normalcy as vaccination programs throughout the country appear to be accelerating and expanding to cover what now appears to be all age groups. Refinery operations in the United States have now returned to pre-Texas freeze levels. The net effect of this recovery has been significantly higher US Crude inventories with refined product inventories within reasonable range of seasonal norms.

US Crude inventories increased for a fifth consecutive week and fifth in nine, rising by 1.912 MB. US Crude stocks are now 6% over their five-year average and are 47.3 MB above levels of last year at this time. US Crude inventories have increased by nearly 40 MB over the last four weeks. US Crude inventories are now near their highest levels since December. The price of WTI fell by $0.15 on the week. Inventories in the three PADDs affected by trans-Atlantic trade increased by 4.627 MB. The gain was again disproportionately high in PADD 3, the US Gulf Coast, where stocks increased by 5.385 MB. This was influenced in part by an increase in production of 100 KBPD to a level of 11 MBPD as well as due to a continued low flow of US exports which stand at 2.5 MBPD. Inventories in Cushing Oklahoma, the Nymex delivery point, fell by 1.935 MB, the second consecutive week stocks have fallen there. The Cushing draw was driven in large part by a third consecutive weekly increase in refinery utilization. Runs grew by 6%. Utilization rates now stand at 81.6%, a level proximate with pre-Texas freeze rates. We expect utilization rates to level off in the coming week and export rates to increase significantly as the WTI/Brent spread should widen considerably in favor of Brent as the flow of Middle Eastern Crude to Europe has been disrupted with the closure of the Suez Canal. As a consequence, we expect Crude inventories in the United States to be within 500 KB of unchanged in the week ahead.

US Gasoline inventories increased for a second week in four, rising by 204 KB. Gasoline stocks are slightly more than 6% below their five-year average and are 7.0 MB below levels of last year at this time. The price of RBOB gained 242 points on the week. Inventories in the three PADDs affected by trans-Atlantic trade gained by 692 KB. The increase was most pronounced in PADD 3 where stocks rose by 882 KB as refinery utilization rates cited in the Crude section above increased substantially. Inventories in the PADD 1 subsection that encompasses New York Harbor increased by 354 KB as the flow of imports increased by 29 KBPD to a level of 939 KBPD. Shipping data indicates a slight drop in the flow of imports in the week ahead. This could become a key feature going forward if utilization rates drop in Europe due to the Suez Canal closure. Gasoline demand, perhaps driven by spring vacations, rose by 174 KBPD to a level of 8.616 MBPD. With the emerging view that Gasoline prices may well be stabilizing, we expect demand to remain at or near current levels in the short term. We further expect production which fell by 300 KBPD to a level of 8.577 MBPD to increase in the near term. We expect Gasoline inventories to also remain near unchanged in the coming week.

US Distillate inventories increased for a second week in nine, rising by 3.806 MB. Distillate stocks are now 3% below their five-year average yet are 17.2 MB above levels of last year at this time. The price of ULSD fell 123 points on the week. Inventories in the three PADDs affected by trans-Atlantic trade gained by 3.285 MB. The increase was most pronounced in PADD 2, the US midcontinent, where stocks rose by 1.604 MB. This is due in large part to an increase in refinery utilization rates that has contributed to the drop in Cushing Oklahoma Crude supplies as cited above. Distillate demand fell by 436 KB on the week to 3.592 MB as virtually no significant thermal demand was apparent. Shipping data does indicate a further increase in exports in the week ahead. Exports jumped this week by 441 KBPD to a level of 1.1 MBPD. We expect that figure to be close to 1.35 MBPD next week. The probable increase in exports and what should be static demand should result in a drop in Distillate inventories next week by 1.5 to 2.0 MB.

The continued closure of the Suez Canal should result in an increase in Brent values versus WTI as well as an increase in Gasoil values versus ULSD. An extended closure of the Canal would be quite supportive of outright prices. Refined products stocks which reflect shifts in demand linked to the Covid-19 virus are the key to market direction. At this time, US stocks are stable while European and to a lesser extent Asian stocks may well grow. The growth in such stocks will be constrained by the Canal closure and continued growth of Covid-19 cases. We expect outright prices to increase slightly in the week ahead.