Market Summary: March 7, 2021

Petroleum prices rose more than 7% on the week, approaching two-year highs on the surprise OPEC+ decision to maintain output at current levels, dashing expectations of a small production increase amid evidence of global market demand emerging from the yearlong Covid-19 pandemic. On the week, WTI gained 7.5%, Brent 7.7%, RBOB 5.9% and ULSD 5.5%. Three major investment banks now see a $70-$80 price range for Crude in the third quarter and possibly sooner. The US-based IEA now sees OECD commercial inventories back to their pre-pandemic five year average. The lion’s share of statistics related to the recent big freeze in Texas were reported in this week’s EIA inventory statistics which resulted in historic lows in refinery utilization. Total commercial petroleum inventories in the US fell by 2.8 MB on the week.

A positive employment report and concerns of a disorderly move in the bond market as cited by the chair of the Federal Reserve resulted in mixed equity indexes on the week. The Dow gained 1.8%, the S&P gained 0.8% while the NASDAQ fell 2.1% amid increasing concern of inflation. The dollar index increased by 1.06 on the week to settle at 91.99. Gold prices fell for the third week in a row, settling at their lowest level since June 5th at $1,698.50 per ounce.

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OPEC+ output remained unchanged at the end of their meeting on Thursday. The Saudi’s agreed to maintain their 1 MBPD unilateral reduction through the month of April. Russia, hopeful for an increase in production and an easing of prices, chose to go along with the Saudi’s path of caution and restraint. In return, Russia and Kazakhstan were authorized to increase output by 130 KBPD and 20 KBPD respectively for increasing domestic needs. OPEC+ compliance entering the meeting was at a remarkably high 112%. Prices rose by 4% on Thursday upon the release of the decision.

The impact of the OPEC+ decision on the major Asian economies of India and to a slightly lesser extent China will be significant as demand in these two countries has recovered past pre-Covid-19 levels. Concerns of damaging inflation in India are particularly high.

As of Friday, seven of the 18 largest refineries on the US Gulf Coast were operating. The balance are expected to be operating, at least in part, by the end of next week. The reductions in Gasoline and Distillate supplies as well as refinery utilization and the increase in Crude supplies are simply astounding as a number of historic highs and lows were set in this week’s statistics.

Major oil sands producers in Western Canada have idled more than 500 KBPD of production capacity in the aftermath of the suspension of the Keystone pipeline by the current US administration. Virtually all of the Western Canadian production was scheduled to pass through the pipeline to the United States. Truck and rail transport, representing a fraction of the original pipeline flow, will find its way into the US.

There is an emerging view that US shale production will not recover in the midst of current higher pricing as financing and licensing for such expansion would likely encounter significant impediments from the current US administration.

US Crude inventories increased for a second consecutive week and second week in six, rising by 21.563 MB. This was the largest weekly increase in Crude inventories in more than 39 years. US Crude stocks are now 3% over their five-year average and 40.5 MB above levels of last year at this time. The price of WTI gained $4.59 on the week. Inventories in the three PADDs affected by trans-Atlantic trade gained by 22.359 MB. The gain was most pronounced in PADD 3, the US Gulf Coast, where stocks rose by 20.855 MB. This increase was driven by the fact that refinery utilization in PADD 3 fell to a level of 41% of rated capacity, a historic low. National refinery utilization fell by 13% to 56% of capacity, also a historic low. Inventories at the Nymex delivery point of Cushing Oklahoma gained by a relatively small 485 KB. Cushing inventories are now proximate to their five-year average. US imports rose by 1.693 MBPD as increased flow from Canada as well as a backlog in vessels delayed from discharging due to severe cold increased overall supplies. US exports stand at 2.4 MBPD and are expected to rise slightly in the week ahead as the differential between WTI and Brent remains wide. Domestic production remains relatively stable, having gained by 300 KBPD to a level of 10 MBPD. A sharp increase in utilization, static imports and production and a possible increase in exports should result in US Crude stocks falling by 8 to 8.5 MB in the coming week.

US Gasoline inventories fell for the first week in six, dropping by 13.26 MB. This was the largest weekly drop in US Gasoline inventories ever. Gasoline stocks are now more than 3% below their five-year average and 8.5 MB below levels of last year at this time. This is the first time in a year that Gasoline inventories have fallen below their five-year low. The price of RBOB gained 1877 points on the week. Inventories in the three PADDs affected by trans-Atlantic trade fell by 1.312 MB. The reduction was most pronounced in PADD 3, the US Gulf Coast, where stocks fell by 11.028 MB. Inventories actually increased in the PADD 1 subsection that encompasses New York Harbor, the Nymex delivery point, rising by 185 KB. This was facilitated in part by an increase in imports, as expected, by 74 KBPD to a level of 605 KBPD. Shipping data indicates a possible further increase in the flow of imports to the US East Coast. Gasoline demand increased by 941 KBPD on the week to reach a level of 8.148 MBPD, the highest level of demand since the onset of Covid-19. An incongruity is apparent in the increase in Gasoline production by 565 KBPD to a level of 8.301 MBPD as overall refinery utilization fell by 13%. We expect a correction to the overinflated production figure in the coming week. A likely increase in production should be offset by continued highs in demand though the average price at the pump in the US is now $2.744 per gallon. A number of analysts expect the price at the pump to exceed three dollars per gallon by Memorial Day weekend. Increased production, likely static demand, and a small increase in imports should result in a build in Gasoline inventories of as much as 4.5 to 5.0 MB in the week ahead.

US Distillate inventories fell for a 6th consecutive week, falling by 9.719 MB. Distillate stocks are now 2% below their five-year average and 8.5 MB below levels of last year at this time. The price of ULSD gained 875 points on the week. Inventories in the three PADDs affected by trans-Atlantic trade fell by 9.244 MB. The reduction was again most pronounced in PADD 3, the US Gulf Coast, where stocks fell by 6.917 MB. The 41% utilization rate in the Gulf is the reason for the drop. National Distillate production has dropped by 44% in the last two weeks. An increase in production is highly probable. Demand, which fell by 144 KBPD to a level of 3.788 MBPD, should remain near unchanged in the week ahead. Exports, currently at 800 KBPD, should remain static at best. We expect a sharp increase in Distillate production in the week ahead which should enable inventories to increase by 4.0 to 4.5 MB.

A significant portion of the dramatic changes from the big freeze were not reported until this past week. We expect no new surprises in any measure showing diminished output or production. Some measure of retribution from the crown prince of Saudi Arabia toward the US president after direct personal accusations of the crown prince’s involvement in the murder of a Saudi dissident in Turkey as well as efforts, though somewhat disjointed, to thaw US/Iranian relations may have driven Saudi insistence in orchestrating a surprising response in output that can damage any measure of US economic recovery. We expect outright prices to rise and further expect Gasoline cracks will increase in the very near term.