Market Summary: May 23, 2021

Petroleum prices experienced their largest weekly drop since March, falling for the first week in four primarily due to the emerging view that Iranian supplies will increase amid reports of progress in diplomatic discussions in Vienna that may lead to the resumption of US participation in the JCPOA agreement of 2015. The threat of such supply increases when coupled with the recent rise in output from the OPEC+ agreement drove prices significantly lower on Wednesday and Thursday. Ongoing growth in coronavirus cases in Asia generally and India specifically as well as Brazil continue to temper prospects of global demand increases. On the week, WTI prices fell 2.7%, Brent 3.3%, RBOB 2.7% and ULSD 2.4% as total commercial petroleum inventories in the United States fell by 0.2 MB. A tropical disturbance emerging in the US Gulf Coast and positive inventory data in the US tempered price weakness.

US equity indexes fell on the week as Federal Reserve officials stated they would not attempt to tighten the supply of dollars. On the week, the Dow lost 0.5% and the S&P 0.4%. The NASDAQ gained 0.3%. The comments from the Federal Reserve helped drive the dollar index to near three month lows, settling at 90.03. Gold prices rose for a third consecutive week, touching four-month highs on Thursday before some profit-taking on Friday, ending the week at $1,881.80 per ounce.

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Statements from parties involved in discussions in Vienna regarding the JCP0A agreement varied depending on their diplomatic and political affiliation. A spokesperson for the US Department of State stated many challenges remain on a number of different issues regarding Iranian discussions. European diplomats made more optimistic comments with limited specificity. Comments from Iranian officials were mixed. Members of their diplomatic corps in Vienna were more optimistic than a number of government officials in Iran. The most optimistic comments came from the Iranian president who stated in a televised cabinet meeting that an agreement with the US was an effective fete accompli. It should be noted that the president of Iran is up for reelection in less than two weeks. Discussions among all parties are scheduled to resume in Vienna on Tuesday.

The Indian Oil Company, India’s largest refining group, announced that it had reduced throughput at the refineries by 12% down to a level of 84% of capacity in all of their facilities in April. Separately, compounded reports of retail Gasoline and Diesel sales show a reduction in consumption of between 18% and 20%. These reductions are due to the unbridled expansion of Covid-19 cases in the country.

An English bank issued a report entitled “Cautious supply, healing demand” this week that allows for a short-term reduction in Asian demand while still anticipating a deficit in global petroleum supplies in the second half of 2021.

A travel protocol has been established in the EU requiring divulgence of Covid-19 immunity status to travel freely in the bloc. It is believed that this protocol will spur summer travel and increase petroleum consumption significantly as a consequence.

US Crude inventories increased for the first week in three and third week in five, rising by 1.32 MB. US Crude stocks are now 1% below their five-year average and are 40.5 MB below levels of last year at this time. The price of WTI fell 1.79 on the week. Inventories in the three PADDs affected by trans-Atlantic trade gained by 3.317 MB. Inventories in PADD 3, the US Gulf Coast, gained by the smallest amount of the three PADDs, rising by only 885 KB as refinery closures linked to the Colonial Pipeline stoppage were limited. Inventories at the Nymex delivery point of Cushing Oklahoma fell for a second week in a row, dropping by 142 KB. Inventories at Cushing are now well below their five-year average. As expected, US Crude exports increased significantly and now stand near five-year highs of 3.3 MBPD. There was a significant narrowing of the Brent/WTI spread on Friday that should temper the ongoing flow of US Crude exports. In the near term however, a number of ships are scheduled to maintain a strong export flow in the week ahead. This fact, coupled with utilization rates that should increase, will probably result in Crude stocks falling in the week ahead by 2.0 to 2.5 MB.

US Gasoline inventories fell for a second week in 10, dropping by 1.963 MB. The price of RBOB decreased by 581 points on the week. Inventories in the three PADDs affected by trans-Atlantic trade fell by 573 KB. As expected with the Colonial Pipeline outage, inventories in PADD 1, the US Atlantic, fell by 4.579 MB while inventories in PADD 3, the US Gulf Coast, increased by 5.733 MB. There was also a reduction in inventories in PADD 2, the US midcontinent, where stocks fell by 1.727 MB. Demand for Gasoline spiked, rising by 424 KBPD to a level of 9.224 MBPD, the highest single week demand figure since March 2020. Reports of hoarding at the retail level linked to the pipeline outage appear to have contributed to the rise in demand. This, coupled with a traditional move of inventories to secondary storage in advance of the Memorial Day weekend which represents the start of summer driving season, helped push inventories lower despite production of Gasoline standing at close to five-year highs. Inventories in the PADD 1 subsection that encompasses New York Harbor, the Nymex delivery point as well as the terminus for the Colonial Pipeline, fell by 3.022 MB. This occurred despite an increase in imports of 145 KBPD to a level of 1.081 MBPD. We expect this import figure to rise significantly in the week ahead as the early flow of increased exports from northwest Europe linked to the Colonial outage start to arrive. Still strong demand due to the holiday weekend may well offset a significant spike in imports. We expect production to remain stable and anticipate a small draw in Gasoline stocks in the coming week of 1.0 to 1.5 MB.

US Distillate inventories fell for a sixth consecutive week, dropping by 2.324 MB. Distillate stocks are now 5% below their five-year average and are 26.7 MB below levels of last year at this time. The price of ULSD fell by 480 points on the week. Inventories in the three PADDs affected by trans-Atlantic trade fell by 2.586 MB. The reduction was again most pronounced in PADD 1, the US Atlantic, where stocks fell by 2.904 MB. Similar to Gasoline, Distillate inventories rose in the US Gulf Coast due to the Colonial Pipeline outage, rising by 1.218 MB. This increase occurred as exports remained relatively consistent, standing at 1.1 MBPD. Shipping data did indicate a spike in chartering activity which has appeared to ease over the last few trading days. Demand for Distillate remains strong at 4.058 MBPD despite waning agricultural needs but appears to remain firm due to increasing industrial activity. Distillate production actually fell slightly this week, decreasing to 4.553 MB, a figure we expect will be consistent in the week ahead. Such consistent production and exports, coupled with demand that at the very least will remain steady, should enable Distillate inventories to fall further in the coming week. We anticipate Distillate inventories will fall by 2.5 to 3.0 MB in the week ahead.

Given the obvious political calculus in the comments regarding the status of the JCP0A talks in Vienna, we would be most surprised to see an outcome in the week ahead where Iran can resume exports to pre-embargo levels. Though there was a reduction of non-commercial length in petroleum contracts in both streams of Crude and Gasoline, there was growth in length in both Distillate contracts. This, coupled with the fact that Distillate stocks are lower in their five-year average measure than the other two main streams of petroleum, lead us to believe that ULSD and Gasoil will remain the strongest relative values in the petroleum complex. Given likely continued dollar weakness due to comments of the Federal Reserve cited above as well as the probability that no substantive improvement will occur in the Iranian discussions, we anticipate outright prices will increase in the week ahead.