Petroleum prices reached two-year highs, gaining for the second consecutive week and fifth in the last six. Continuing expectations of demand recovery, a strong report from the EIA regarding demand increases for the balance of 2021 and evidence of a clear re-opening of the European economy were the primary market drivers. Prices increased despite a 4% drop in US refined product demand and the average retail price at the pump for a gallon of Gasoline in the US reaching more than $3.12. On the week, WTI gained 5%, Brent 4.6%, RBOB 3.3% and ULSD 3.6% as overall commercial petroleum inventories in the US fell by 5.1 MB.
US unemployment numbers improved this week, but not to the level of most expectations which resulted in major stock indices improving marginally. On the week, the Dow gained 0.7%, the S&P 0.6% and the NASDAQ 0.5%. The high threat of inflation remains a constant in all financial markets which will likely cause any economic recovery to be bumpy. The Dollar index improved slightly on the week, gaining by .07 to reach 90.13. Gold prices fell by 0.7% on the week to settle at $1,892.00 per ounce.
The US government-based EIA issued a report this week citing expectations of global petroleum demand growth of 2.2 MBPD in the second quarter, 1.9 MBPD in the third quarter and 1.1 MBPD in the fourth quarter of 2021, with global demand reaching 100 MBPD again at year’s end.
OPEC+ concluded their monthly meeting in Vienna on Tuesday in less than twenty minutes. The group continues to maintain its course and adhere to its plan of gradual output increases designed to match anticipated growth in demand. Compliance for May has been estimated by multiple sources at 122%. Russia, traditionally a laggard in compliance to such agreements, is restraining its production and is maintaining 100% compliance. Despite this, a number of senior Russian officials have started to make overtures of increasing production by a larger amount at the group’s next meeting a month from now.
A fifth round of talks between the US, Iran and the other members of the UN Security Council failed to make any further headway on an effort to resume adherence to the JCPOA of 2015. With Iranian presidential elections less than two weeks away, hopes for any substantive agreement to resume limits on Iranian nuclear expansion or expand petroleum output with hopes of easing sanctions are fading.
Demand for refined products in India fell by between 19 and 20% for both Gasoline and Distillate, the latter of which represents nearly 40% of India’s demand slate. Indian refinery utilization has been reduced by approximately 700 KBPD to a level of 4.2 MBPD as the nation is still struggling with rampant expansion of the Covid-19 virus.
US Crude inventories fell for the fourth week in five, dropping by 5.079 MB. US Crude stocks are now 3% below their five-year average and are 53.0 MB below levels of last year at this time. The price of WTI gained by $3.30 on the week. Inventories in the three PADDs affected by trans-Atlantic trade fell by 4.486 MB. Inventories in PADD 3, the US Gulf coast, fell by the largest amount, dropping by 5.638 MB. Utilization reaching 88.7% of capacity, its highest level of the year as well as lower production and imports contributed to this reduction. Inventories at the Nymex delivery point of Cushing Oklahoma rose for the first week in four, rising by 784 KB. Export flows should remain somewhat stable based on current shipping data. Unchanged to slightly higher utilization rates should be expected. A possible further reduction in domestic production figures linked to summer maintenance should result in a decrease in Crude inventories in the week ahead. We expect Crude inventories in the US to fall by 2.0 to 2.5 MB
US Gasoline inventories increased for the first week in three, rising by 1.499 MB. US Gasoline stocks are now 3% below their five-year average and are 23.8 MB below levels of last year at this time. The price of Gasoline gained by 713 points on the week. Inventories in the three PADDs affected by trans-Atlantic trade gained by 1.55 MB. The increase was, again, most severe in PADD 1, the US Atlantic, where stocks grew by 2.029 MB. Inventories in the PADD 1 subsection that encompasses New York Harbor, the Nymex delivery point, gained by 160 KB as imports fell by 101 KBPD. Imports remain somewhat elevated at 933 KBPD. Gasoline demand eased by 333 KBPD, a somewhat common event in the week after Memorial Day weekend. Demand could have also been affected in part by the average retail price at the pump now exceeding $3.12 per gallon, a new six and a half year high. US Gasoline demand still remains above pre Covid-19 levels. A further increase in utilization rates and production, a reduction in imports, perhaps significant based on shipping data and demand that is likely to be near unchanged should result in US Gasoline inventories being within 500 KB of unchanged in the coming week.
US Distillate inventories increased for the first week in eight, rising by 3.920 MB. US Distillate stocks are now 8% below their five-year average and are 23.8 MB below levels of last year at this time. The price of ULSD gained by 754 on the week. Inventories in the three PADDs affected by trans-Atlantic trade increased by 3.920 MB. The growth was most significant in PADD 2, the US Midwest, where stocks grew by 1.653 MB. Growth of such magnitude in this district is usually indicative of the end of seasonal agricultural demand as most crops have now been planted. Distillate exports are expected to be approximately 1.1 MBPD as shipping data indicates a growing list of tonnage in the area. As expected, the demand figure fell by 648 KBPD to a level of 3.813 MBPD as there was no cause for large draws to secondary storge. We expect a further reduction in demand of 150 KBPD, no significant change in production and a slight increase in exports. This should result in another increase in Distillate stocks of 1.5 to 2.0 MB in the week ahead.
There is a strong prevailing view that any price pullback represents a new buying opportunity. Even though there was a brief lull this week, the dollar is still expected to weaken further in the near and medium term. Despite these bullish considerations, we would approach the market with caution. Cracks weakened through the week. OPEC+ compliance at 122% likely has nowhere to go but down as the biggest single cause of overproduction has always been higher prices. Prices may well continue to rise, but in an increasingly choppy fashion.