Market Summary: May 9, 2021

Petroleum prices increased for a second consecutive week as Brent neared $70 per barrel midweek. The largest weekly decline in US Crude inventories in over a year, a weakening dollar, strong economic data from China and easing summer travel restrictions in the EU provided price support. Overwhelming increases in Covid-19 cases in India served to restrain price growth. On the week, WTI prices gained 2.1%, Brent 2.3%, RBOB 2.4% and ULSD 4.6%. Total US commercial petroleum inventories fell by 5.6 MB on the week. Since its peak of last June, total Crude and refined products inventories in the United States are now only 1.4% over five-year averages, effectively removing all excess supplies linked to Covid-19. A cyberattack on the Colonial Pipeline operating system occurred on Friday, providing support for cracks and altering differentials for refined products upward in the Northeast and downward in the Gulf Coast.

Poor employment numbers released this week are likely to fuel the ongoing loose monetary policy of the Federal Reserve as the oversupply of money persists. Equity indexes in the US were mixed on the week as the Dow gained 2.7% and the S&P 1.2%. The NASDAQ fell by 1.5%. The dollar index deteriorated significantly this week, falling by more than 1.1% to settle at 90.23. Dollar weakness contributed to gold reaching its highest level in three months, gaining 3.6% on the week to settle at $1,831.30 per ounce.

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OPEC+ has started to increase production. Output is scheduled to increase by a total of 600 KBPD in the month of May, 350 KBPD from OPEC+ and 250 KBPD from Saudi Arabia. Libya saw production fall by 80 KBPD to a level of 1.4 MBPD. Iran saw a gain of 60 KBPD in production to a level of 2.41 MBPD. Both Libya and Iran are members of OPEC that are not party to the OPEC+ agreement.

New Covid-19 cases in India reached an alarming new high of 414,000 cases on Friday. India has experienced 21.9 million cases of Covid-19 since the start of the pandemic and has only inoculated approximately 12% of their population. Conversely, the United States has inoculated nearly half of its citizens. Crude imports to India in the last two weeks have fallen and now stand at 3.97 MBPD. Indian Crude imports are now 11.8% below levels of last year at this time.

The entire network of the Colonial Pipeline was closed on Friday due to a cyberattack involving ransomware that paralyzed the flow of the entire system. The Colonial Pipeline moves roughly 2.5 MBPD of clean refined product through its 5,500 mile pipeline system that supplies roughly 45% of the US Atlantic coast’s refined product needs. The pipeline was last closed in 2017 in the wake of Hurricane Harvey. This is significantly different as there is no refinery damage. Price differentials in the US Gulf Coast fell sharply and freight rates in the region increased as a consequence. Refined product prices on Nymex and cash differentials in the Northeast rose considerably. The duration of the closure at the time of this writing is unknown.

US Crude inventories fell for the first week in three and third week in six, dropping by 7.99 MB. US Crude stocks are now 2% below their five-year average and are 74.1 MB below levels of last year at this time. The price of WTI gained $1.32 on the week. Inventories in the three PADDs affected by trans-Atlantic trade fell by 9.616 MB. The reduction was disproportionately large again in PADD 3, the US Gulf Coast, where stocks fell by 10.41 MB. The reduction was driven by both an increase in refinery utilization as well as a sharp increase in exports to a level of 4.1 MBPD, the highest outflow of Crude from the United States since March 2020. This was the largest single week jump in exports since July 2018 and now renders US Crude exports above five-year highs. Inventories at the Nymex delivery point of Cushing Oklahoma increased for a second consecutive week, rising by 254 KB. The flow of imports dropped by 1.165 MBPD to a level of 5.451 MBPD. The sharp increase in exports and sharp reduction in imports are reflected in the steepening discount of WTI in the WTI/Brent spread. The closure of the Colonial Pipeline, should it persist, will serve to reduce refinery utilization, likely resulting in a further increase in Crude exports. Any increase in inventories linked to reduced utilization rates should be offset in large part by increased export flows. As a consequence, we expect Crude inventories to fall in the coming week by 2.0 to 2.5 MB.

US Gasoline inventories increased for a seventh week in eight, rising by 737 KB. Gasoline stocks are now 2% below their five-year average and 20.6 MB below levels of last year at this time. The price of RBOB gained 571 points on the week. Inventories in the three PADDs affected by trans-Atlantic trade gained by 1.699 MB. The change was most pronounced in PADD 3, the US Gulf Coast, where stocks rose by a disproportionately high 2.108 MB. Persistently high utilization rates, cited above, enabled inventories in the PADD 1 subsection that encompasses New York Harbor to gain by 142 KB. US Gasoline imports fell marginally, dropping by 1 KBPD. The flow of imports remains quite high at 1.02 MBPD and is likely to increase further as flows from northwest Europe to the US East Coast should logically increase given the reduced flow of the Colonial Pipeline northward. Imports, already at five-year highs, should continue to bolster clean freight values from northwest Europe. Demand, currently at 8.864 MBPD, is now at pre-pandemic levels and should, at the very least, remain stable. It is unlikely that such an increase will be reflected in this upcoming week’s stats. We therefore anticipate Gasoline inventories will remain within 500 KB of unchanged in the week ahead.

US Distillate inventories fell for a fourth consecutive week, dropping by 2.896 MB. Distillate stocks are now 2% below their five-year average and are 15.3 MB below levels of last year at this time. The price of ULSD gained by 895 points on the week. Inventories in the three PADDs affected by trans-Atlantic trade fell by 2.594 MB. The reduction was most pronounced in PADD 2, the US midcontinent, where stocks fell by 1.932 MB. This reduction is largely attributable to increasing agricultural as well as industrial needs. Inventories in PADD 1, the US East Coast, fell by 1.384 MB as stocks remain at their lowest levels since April of last year. Inventories in PADD 3, the US Gulf Coast, increased by 722 KB as utilization rates remain high. As expected, exports from the US Gulf increased for the first week in four and are expected to rise further given the closure of the Colonial Pipeline. Possibly unchanged utilization rates and steady demand linked to agricultural and industrial needs should result in a further reduction of Distillate supplies. A substantial increase in exports may intensify such a figure. We expect Distillate inventories to fall in the coming week by 1.5 to 2.0 MB.

Clarification of the issue of OPEC production increases possibly being too much too soon on the direction of global Crude supplies given India’s emerging demand limitations will determine outright price direction. Current data and projections from analysts indicate growth in demand elsewhere will more than offset such reductions from India. The duration of the Colonial Pipeline closure will determine the direction of cracks in the US which increased on Friday upon release of the news. All three key inventory levels (Crude, Gasoline and Distillate) are now proximate to their five-year averages and below levels of last year at this time. Demand in the US is increasing as are the vaccination percentages of the population. Dollar weakness appears significant and should persist for the foreseeable future. We expect outright prices to increase along with cracks in the week ahead.