Petroleum prices increased for a third consecutive week. The Colonial Pipeline reopened after six days of closure due to a cyberattack from eastern European hackers that disrupted flows of refined product in all three PADD districts affected by trans-Atlantic trade. This disruption and overwhelming inflation throughout the US economy enabled the average price of Gasoline at the pump in the United States to reach its highest level in six years, exceeding $3.02 per gallon. Prices were further supported by an IEA report issued on Wednesday and an OPEC report released on Thursday stating that demand is now exceeding supply and that the global supply surplus associated with the Covid-19 pandemic of the last year has been virtually erased. Geopolitical concerns increased due to a sharp escalation in tensions between Israel and the Palestinians, reaching a level of near all-out war. On the week, WTI gained 0.7%, Brent 0.6% and ULSD 1.3% as RBOB remained near unchanged. Total commercial petroleum inventories in the United States increased by 3.9 MB. Further reductions in refinery utilization in India as Covid-19 cases continue to escalate throughout the country was the only item that bore a negative impact on prices for the week.
Overwhelming data showing a slowdown of economic activity keyed by flat retail sales as well as an alarming resurgence in inflation which rose to levels not seen since the late 1970s resulted in a reduction in all US equity indexes. On the week, the Dow lost 1.1%, the S&P 1.4% and the NASDAQ 2.3%. The dollar index recovered at week’s end to finish near unchanged at 90.30. Gold reached its highest level since February, gaining $12.50 on the week to settle at $1,843.80 per ounce.
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The Colonial Pipeline was completely restarted on Thursday after a six day interruption caused by hackers based in Eastern Europe and Russia known as “the Darkside.” The hackers, who Russian authorities neither condone nor pursue for criminal activity, collected $5 million in ransom enabling Colonial to reinstate the pipeline’s operating systems. The disruption has resulted in lines at gas stations throughout the East Coast where prices have reached their highest levels since October 2014. There is a report that the US president has waived the Jones act to enable one vessel to ship Gasoline from Houston to New York in an effort to alleviate limited supplies. It is estimated that the flow of more than 7.5 MB of Gasoline and 6 MB of Distillate was disrupted in the US due to this outage. The true impact of the Colonial Pipeline closure will be reflected only in part by statistics released in the coming week by the API and EIA. The flow of Gasoline imports from northwest Europe which based on shipping reports should be rather substantial will not be reflected in statistics until the following week.
In its monthly report released on Wednesday, the Paris-based IEA stated “the anticipated supply growth through the rest of the year comes nowhere close to matching our forecast for significantly stronger demand beyond the second quarter.” The report went on to state that it expects demand to exceed production by 2.5 MBPD at year’s end as second half 2021 demand will sharply increase. The report maintains that even if Iran returns to full pre-sanction production levels, there will still be a shortfall in global production. OPEC issued a report on Thursday essentially echoing the views of the IEA.
A number of analysts and publications now expect a reduction in demand of 100 to 200 KBPD in India due to the unchecked expansion of Covid-19 cases.
US Crude inventories fell for a second week in four and fourth week in seven, dropping by 426 KB. US Crude stocks are now 2% below their five-year average and are 46.8 MB below levels of last year at this time. The price of WTI gained $0.47 on the week. Inventories in the three PADDs affected by trans-Atlantic trade fell by 746 KB. In what is likely to foreshadow inventory direction of next week, Crude inventories in PADDs 1 and 2, the Atlantic coast and Midwest, fell by a total of 2.52 MB while inventories in PADD 3, the US Gulf Coast, rose by 1.88 MB. Inventories at the Nymex delivery point of Cushing Oklahoma fell by 421 KB despite a sharp reduction in Crude exports from the United States which fell to their lowest levels since October 2018. A sharp reduction in refinery utilization rates, particularly in the US Gulf Coast due to the Colonial Pipeline closure, should result in an increase in both Crude exports as well as inventories. We expect refinery utilization to fall by as much as 3% to a level closer to 83% of capacity in the week ahead. As a consequence, we expect Crude inventories in the United States to increase sharply, rising by as much as 6 MB in the coming week.
US Gasoline inventories increased for an eighth week in nine, rising by 378 KB. Gasoline stocks are now 1% below their five-year average and are 16.7 MB below levels of last year at this time. The price of RBOB fell by three points on the week. Inventories in the three PADDs affected by trans-Atlantic trade gained by 134 KB. Small increases in PADDs 1 and 2 offset a small reduction in PADD 3, the US Gulf Coast. Inventories in the PADD 1 subsection that encompasses New York Harbor, the Nymex delivery point, fell by 1.147 MB. Given the circumstance of the Colonial Pipeline, we expect this figure to fall substantially in the coming week. We further anticipate that any increase in import flows from northwest Europe will not be reported in this upcoming week’s statistics but will only be reflected in the week thereafter. Gasoline demand remains high, at 8.8 MBPD. The impact of demand due to retail supply shortfalls this week should render demand figures slightly lower. With the reduction in refinery utilization in the US Gulf Coast, we anticipate US Gasoline inventories will fall by 6.5 to 7.0 MB in the week ahead.
US Distillate inventories fell for a fifth consecutive week, dropping by 1.734 MB. Distillate stocks are now 3% below their five-year average and are 20.6 MB below levels of last year at this time. The price of ULSD gained 256 points on the week. Inventories in the three PADDs affected by trans-Atlantic trade fell by 1.942 MB. The reduction was most pronounced in PADD 1, the US Atlantic, where stocks fell by 1.699 MB. Stocks also fell in PADD 3, the US Gulf Coast, dropping by 1.358 MB. Demand for Distillate fuel is now 22.9% higher than last year at this time. Demand for jet fuel is now 107.5% higher than last year at this time. The disruption of the Colonial Pipeline resulted in a dramatic spike in Gulf Coast freight rates for destinations in Central and South America as well as Europe. We anticipate the flow of Distillate exports next week will exceed 1.6 MBPD. Due to a reduction in production as well as an increase in exports, we anticipate a severe reduction in Distillate inventories in the coming week of 7.5 to 8 MB. Such a reduction will result in Distillate inventories being significantly below levels of last year at this time.
Given the events of last week, we expect Distillate to be the strongest relative value in the petroleum complex in the near term. Though Crude inventories in the United States are likely to increase substantially in the coming week, it is difficult to foresee any outright reduction in prices due to what is clearly an excessive oversupply of dollars in the economy that has resulted in an alarming spike in inflation. We therefore expect outright prices to increase in the near term.