Market Summary: June 20, 2021

Crude prices rose for a fourth consecutive week as optimism regarding an economic recovery propelled Crude prices to multiyear highs. The ambiguous intent of the current administration regarding renewable fuel policy has sent mixed signals to the market resulting in a sharp reduction in crack values as both refined product futures lost value on the week. Refinery utilization is now at 18-month highs and demand levels for Gasoline and Distillate in the United States are lagging behind output figures. The third tropical cyclone of hurricane season served to bolster crack values through part of the week. Such strength faded as the storm center veered east. It reached landfall between eastern Louisiana and the Florida Panhandle at the time of this writing. Total commercial petroleum inventories in the United States fell by 4.6 MB. The price of WTI gained 1% and Brent gained 1.1% while Gasoline lost 0.9% and ULSD 2.3%.

U.S. equity indices experienced their worst weekly loss since February as the Federal Reserve signaled short-term interest rates would rise at least twice in the next thirty months due to ongoing inflationary pressures. On the week, the Dow lost 3.5%, experiencing its worst week since October 2020. The NASDAQ lost 0.3% and the S&P fell 1.9%. The dollar index increased sharply as a consequence of the Federal Reserve announcement, ending the week at 92.32, a gain of 1.71. Gold prices experienced their largest weekly drop since March 2020, settling at their lowest levels since April, closing at $1,763.90 per ounce.

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A lack of clarity from the current administration on its intent to provide a measure of relief to refiners for renewable fuel obligations has introduced significant uncertainty and volatility into RIN markets that have caused RVO values to fluctuate significantly over the last week and a half. Such fluctuations have heavily contributed to recent volatility in refined products.

The third tropical cyclone of the hurricane season has now passed east of Louisiana and west of the Florida Panhandle. 3.367 MBPD of refinery capacity in the state of Louisiana appears to be free from risk. Excessive rain may lead to some coastal flooding with limited impact on production and refining facilities.

A major U.S. investment bank continues to maintain its view that a rebounding global economy and supply constraints among producers will result in the price of Brent Crude reaching $80 in the third quarter of this year.

Iran has elected a new president who is considered a war criminal by Amnesty International due to mass executions carried out in the Islamic Republic in 1988. Iran's sharp turn toward greater Islamic militancy is likely to stall any further progress in US-Iranian talks currently being held in Vienna in an effort to reengage the 2015 JCPOA agreement.

US Crude inventories fell for a fourth consecutive week and sixth in eight, dropping by 7.355 MB. US Crude stocks are now 5% below their five-year average and are 72.6 MB below levels of last year at this time. The price of WTI gained $0.73 on the week. Inventories in the three PADDs affected by trans-Atlantic trade fell by 6.336 MB. Inventories in PADD 2, the US mid-continent, fell by 3.649 MB as utilization rates in this region spiked to more than 97.3% of rated capacity. This was the fifth consecutive week that utilization rates have increased nationally, rising to their highest levels since January of 2020. Inventories at the Nymex delivery point of Cushing OK which is situated within PADD 2 fell for the first week in three, dropping by a significant 2.15 MB as inventories at Cushing reached their lowest levels since March 2020. US Crude exports increased for a second consecutive week, rising by 1.0 MBPD to a level of 3.9 MBPD. The prompt differential in the WTI/Brent spread has narrowed by more than a dollar in the last month and now stands at $2.19 per barrel. In the week ahead, we expect static production, a further uptick in utilization and somewhat consistent export flows based on current shipping data. As a consequence, we expect Crude inventories in the US to fall by 2.0 to 2.5 MB in the week ahead.

US Gasoline inventories increased for a third consecutive week and third in five, rising by 1.954 MB. US Gasoline stocks are right at their five-year average and are 14.0 MB below levels of last year at this time. The price of RBOB fell by 178 points on the week. Inventories in the three PADDs affected by trans-Atlantic trade gained by 1.914 MB. The gain was disproportionately large in PADD 1, the Atlantic Coast, where stocks increased by 2.553 MB. This increase was driven in large part by very high Gasoline import flows that, despite remaining unchanged on the week, is still at the exceptionally high level of 1.05 MBPD. Shipping data does indicate a slight easing of Gasoline imports in the week ahead by roughly 100 KBPD. Gasoline demand increased for a fourth consecutive week to reach a new post pandemic high of 9.360 MB. Maintaining demand at such a level is likely to prove difficult in the coming weeks. The increase in utilization rates enabled production to increase by 495 KBPD to a level of 9.926 MBPD. We feel that such a demand level will be difficult to sustain. We believe imports will drop slightly as cited above and expect production to remain stable. Consequently, we expect Gasoline inventories to remain within 500 KB of unchanged in the coming week.

US Distillate inventories fell for the first week in three and seventh in 10, dropping by 1.023 MB. US Distillate stocks are now 6% below their five-year average and are 38.3 MB below levels of last year at this time. The price of ULSD fell by 275 points on the week. Inventories in the three PADDs affected by trans-Atlantic trade fell by 790 KB. Inventory growth in the US Atlantic of 1.508 MB was more than offset by the reduction in PADD 3, the US Gulf, where stocks fell by 2.314 MB. The drop in Gulf Coast inventories was largely affected by exports increasing for a third consecutive week, as anticipated. Exports increased by 174 KBPD and are now averaging 1.2 MBPD, a level right near its five-year average. Shipping data indicates a marginal reduction in export flows next week. Distillate demand was reported at 4.336 MBPD, an increase of 923 KBPD. We believe such an increase will be difficult to sustain and expect Distillate demand figures to ease next week to a level closer to 4.0 MBPD. Distillate production reached 5.056 MBPD, an increase of 138 KBPD. We expect Distillate demand will ease in the week ahead while production will at the very least remain static. The anticipated reduction in demand will more than offset any small reduction in export flows. As a consequence, we expect Distillate inventories to rise by 0.5 to 1.0 MB in the week ahead.

US Gasoline production is at its highest level since February of 2020. There appears to be no distinct policy regarding renewable fuels from the current US administration. The outright price of Crude continues to rise. The announcement this week by the Federal Reserve should establish a floor for what had been a crumbling dollar. Outright price increases and deteriorating cracks are normally a feature of a well-supplied market with the threat of geopolitical upheaval which does not appear to be the case now. We will proceed with caution and await probable reduction in refined product demand which, when coupled with a strengthening dollar, may well result in a downward correction in outright prices.

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