Petroleum prices increased for a fourth week in five, touching 31 month highs on Thursday before easing at week’s end. Accelerating demand growth in the US linked to improving economic barometers, constructive inventory reports, the start of summer driving season and a continually weakening US dollar were key drivers for price increases. Signs of improving Covid-19 conditions in Asia and anticipation of a steady course being maintained at the OPEC+ meeting on Tuesday has, in part, eased concerns of an impasse at the JCPOA talks between Iran, the US and the six other members of the UN Security Council in Vienna. On the week, WTI gained 4.3%, Brent 4.8%, RBOB 3.5% and ULSD 2.8% as total US commercial petroleum inventories fell by 7.7 MB.
Positive consumer spending data appears to have overshadowed inflationary concerns, enabling equity indices in the US to improve. On the week, the DJIA gained 0.9%, the S&P 1.2% and the NASDAQ 2.1%. The dollar index improved marginally, settling at 90.06 on the week after having dipped below the 90.00 barrier mid-week. With inflation at its highest level since 2008, gold prices continued to advance, settling at $1,906.30 per ounce, a gain of $24.50 on the week.
A major US investment bank reaffirmed its view that Crude prices would touch $80 by year’s end, even if Iranian production were to reach pre-sanction levels. Another US investment bank’s weekly report bore the heading “Dollar Weakness Outweighs Iran.”
The JCPOA meetings in Vienna continue. There has been talk of a “framework agreement” being in place shortly. It appears that the window for negotiating such an agreement may start to close after the June 18th presidential election in Iran. Iranian production could increase by an additional 900 KBPD over the next 12 months according to independent assessments of the necessary maintenance to long-idled production facilities. It should be pointed out that Iranian production has continued to increase unabated since the presidential inauguration in the US in January. Were no agreement to be reached at the talks in Vienna, the assumption of increases in the flow of Iranian production, provided China agrees to absorb such output at discounted prices, would continue.
The OPEC+ meeting on Tuesday, also in Vienna, is expected to reconfirm the gradual output rise previously agreed to. It remains to be seen if OPEC+ will cite the possibility of further increases of Iranian production influencing their output. A number of analysts believe that expected demand growth through the balance of the year will be able to absorb such increases from Iran and the OPEC+ participants.
Some weight has been placed on petroleum markets particularly in Crude as the CFTC has reported that producer hedging in the last two weeks has reached its highest level since 2017.US Crude inventories fell for the third week in four, dropping by 1.622 MB. US Crude stocks are now 2% below their five-year average and are 50.1 MB below levels of last year at this time. The price of WTI gained by $2.74 on the week. Inventories in the three PADDs affected by trans-Atlantic trade fell by 3.602 MB. Inventories in PADD 3, the US Gulf coast, decreased by the largest amount, falling by 1.902 MB. A reduction in imports of 138 KBPD, the first in three weeks, contributed to this decrease. Inventories at the Nymex delivery point of Cushing Oklahoma fell for a third consecutive week, dropping by 1.008 MB. National utilization rates increased by 1% to 87% of capacity, facilitating such draws. Despite high utilization rates and the continued narrowing of the Brent/WTI spread alluded to last week, export flows increased further, rising by 127 KBPD to a level of 3.4 MBPD. Shipping data indicates a slight reduction in export flows next week. This slight reduction in export flows, stable to slightly higher utilization rates, and consistent domestic production figures should result in a further reduction in Crude inventories in the week ahead of 1.5 to 2.0 MB.
US Gasoline inventories fell for a second consecutive week, dropping by 1.745 MB. US Gasoline stocks are now 3% below their five-year average and are 22.5 MB below levels of last year at this time. The price of Gasoline gained by 717 points on the week. Inventories in the three PADDs affected by trans-Atlantic trade fell by 1.207 MB. The drop was, again, most severe in PADD 3, the US Gulf coast, where stocks fell by 2.261 MB. Inventories in the PADD 1 subsection that encompasses New York Harbor, the Nymex delivery point, fell by 301 KB as imports fell slightly by 47 KBPD. Imports remain high at 1.034 MBPD. Gasoline demand, further enhanced by draws to secondary storage in advance of Memorial Day weekend, increased by 255 KBPD to a level of 9.479 MBPD despite the average retail price at the pump exceeding $3.04 per gallon, a six and a half year high. US Gasoline demand is now well above pre Covid-19 levels. An anticipated small increase in utilization rates and production, a slight increase in imports linked to the Colonial Pipeline disruption of two weeks ago and Memorial Day weekend demand should lead to a small reduction in US Gasoline inventories of 0.5 to 1.0 MB in the coming week.
US Distillate inventories fell for a seventh consecutive week, dropping by 3.013 MB. US Distillate stocks are now 8% below their five-year average and are 35.2 MB below levels of last year at this time. The price of ULSD gained by 837 points on the week. Inventories in the three PADDs affected by trans-Atlantic trade fell by 2.560 MB. The reduction was again most significant in PADD 3, the US Gulf coast, where stocks fell by 1.316 MB. The impact of the disruption and temporary closure of the Colonial Pipeline has ended. Distillate exports which decreased last week to 0.9 MBPD are expected to increase to more than 1 MBPD based on current shipping data. The current demand figure of 4.461 MBPD, a figure clearly driven by draws to secondary storage, will be difficult to repeat. We expect a reduction in demand of roughly 400 KBPD, no significant change in production and an increase in exports of 100 KBPD. We therefore expect an increase in Distillate stocks of 1.5 to 2.0 MB in the week ahead.
There appears to be an emerging consensus that any increase in Iranian output from an eventual easing of sanctions will be absorbed by anticipated demand increases due to improving economic conditions. There also appears to be an expectation that OPEC+ will make output decisions to defend prices should Iranian output increase further. OPEC+ cohesion, as defined by a percentage of compliance, would therefore appear to be the key driver of outright price direction in the near term.