Crude prices rose for a fifth consecutive week as continuing optimism regarding the ongoing economic recovery propelled prices to their highest level since October of 2018. This fifth consecutive week of increases represents the longest such streak since December. Tightening global stocks in the US and elsewhere in the OECD persist as economies, specifically in Europe, gradually reopen. The apparent practical end to diplomatic discussions between the US and Iran provided further support. Total US commercial petroleum inventories fell by 5.8 MB on the week as WTI gained 3.3%, Brent 3.6%, ULSD 2.7% and RBOB 4.4%. A Supreme Court ruling on Friday regarding Renewable Fuel Standards caused refined product prices to plummet versus Crude. Refined product pricing has been increasingly vulnerable to the lack of resolve and consistency in policy on this issue from the current administration.
Additional inflationary data when measured on an annual basis shows the largest increase since 2008 while a “core” metric excluding food and energy reached its highest level in 29 years. Despite this alarming news, rising economic activity linked to diminishing concerns of COVID 19 enabled equity indexes to increase. The Dow gained 3.4%, the S&P 2.7% and the NASDAQ 2.4%. The dollar index fell by 0.49 to settle at 91.81 on the week. The inflationary concerns which weakened the dollar also served to support the value of gold. Gold prices rose for the first week in four, gaining 0.5% on the week to settle at $1,781.80 per ounce.
Cracks fell by more than $1 on Friday as the US Supreme Court reversed a Court of Appeals decision thus upholding the small refinery exemption in which a refinery with less than 75 KBPD of capacity can claim hardship in complying with Renewable Fuel Standards. The decision comes on the heels of an already volatile period for RINS & RVO values as the current administration continues to mull its options.
OPEC+ will meet next week with the result of the meeting expected to be the continued phase-in of production increases that had been agreed to in April and will run through July. There have been some unsubstantiated reports that production hikes may be extended through August. One of the larger participants from the non-OPEC faction of the pact is Kazakhstan which is in the midst of field maintenance, resulting in a reduction in production of 500 KBPD.
Despite claims to the contrary by the outgoing Iranian administration, US-Iranian talks appeared to be at a stalemate with the election of the decidedly more militant president last week. Sanctions, largely unenforceable, are likely to remain in place and Iran will probably continue to export significant volumes of Crude to China at discounted prices.
US Crude inventories fell for a fifth consecutive week and seventh in nine, dropping by 7.614 MB. US Crude stocks are now 6% below their five-year average and are 81.6 MB below levels of last year at this time. The price of WTI gained $2.41 on the week. Inventories in the three PADDs affected by trans-Atlantic trade fell by 6.8 MB. Inventories in PADD 3, the US Gulf Coast, fell by a disproportionately large 5.073 MB. This was due in large part to continued high utilization rates in the region. Refinery utilization nationally remained essentially unchanged at 92.2% of rated capacity. Inventories at the Nymex delivery point of Cushing OK fell by 1.833 MB reaching their lowest levels since March 2020. Dwindling domestic Crude supplies continue to support the WTI/Brent spread. US shale production is now 15% below pre pandemic levels and import rates from Canada remain exceptionally low. Despite the narrowing of the WTI/Brent spread, exports are at five-year highs while imports are near five-year lows. We expect imports to fall slightly based on current shipping data while utilization rates and production should remain unchanged in the week ahead. As a consequence, we anticipate Crude inventories will fall by 4.5 to 5.0 MB in the coming week.
US Gasoline inventories fell for the first week in four and second in six, dropping by 2.93 MB. US Gasoline inventories are now 1% below their five-year average and are 15.3 MB below levels of last year at this time. The price of RBOB gained 956 points on the week. Inventories in the three PADDs affected by trans-Atlantic trade fell by 2.755 MB. The reduction was disproportionately large in PADD 3, the US Gulf Coast, where stocks fell by 4.282 MB. Inventories in the PADD 1 subsection that encompasses New York Harbor, the Nymex delivery point, actually gained by 2.281 MB. This occurred despite a reduction in imports of 210 KBPD to a level of 840 KBPD. This reduction was somewhat in line with our expectations. Imports now stand at close to their five-year average. Shipping data indicates a static flow of imports at best next week. Demand remains quite resilient, gaining 80 KBPD on the week and now stands at 9.44 MBPD. With expectations of a reduction in imports based on current shipping data and unchanged utilization rates, we expect Gasoline inventories to fall significantly in the week ahead due to movements of inventory to secondary storage in advance of the 4th of July weekend. We therefore expect Gasoline inventories to fall by 3.5 to 4.0 MB in the week ahead.
U.S. Distillate inventories increased for the third week in four, increasing by 1.754 MB. US Distillate stocks are now 4% below their five-year average and are 36.8 MB below levels of last year at this time. The price of ULSD gained 561 points on the week. Inventories in the three PADDs affected by trans-Atlantic trade gained by 1.55 MB. The gain was most pronounced in PADD 2, the mid-continent, where stocks increased by 960 KB. This increase was due in large part to disproportionately high refinery utilization rates in the mid-continent as well as limited agricultural demand in the region. Inventories in the Gulf Coast gained by 728 KB. This was largely facilitated by the first reduction in exports in four weeks. Exports fell by 47 KBPD and are now averaging 1.2 MBPD, slightly below their five-year average. Distillate demand fell by 389 KBPD to a level of 3.947 MBPD, somewhat in line with our expectations. Production increased by 56 KBPD and now stands at 5.112 MBPD. We expect production to remain at elevated levels as utilization rates should remain near unchanged with somewhat higher export flows based on current fixing data. The shift of inventories to secondary storage will not be as pronounced for Distillate as it will be for Gasoline. As a consequence, we expect Distillate inventories will remain within 500 KB of unchanged in the week ahead.
Dwindling US Crude supplies, the increasing likelihood of no progress in discussions between the US and Iran, relentless inflation, a 500 KBPD reduction in output from Kazakhstan and pending seasonal field maintenance in Alaskan Crude production facilities all point to the likely continuing increase in WTI structure. The ongoing issues of Renewable Fuel Standards that have provided refined product prices with exceptional volatility cause us to remain wary of the direction of cracks though Gasoline cracks, particularly against Brent, may increase. The relative unity of OPEC+ participants from meetings in the upcoming week should determine market direction. We expect outright prices to increase in the week ahead.