Market Summary: The Fourth of July 2021

Petroleum prices continued to increase as Crude rose for a sixth consecutive week, the longest such streak since December. A dispute within OPEC has extended their scheduled meeting into this week, tempering gains on Friday. All other key market drivers were positive as US Crude stocks continue to tighten, pushing WTI prices into further backwardation which has reached its highest level in three years. The outright price of Gasoline closed at its highest level since October 28, 2014. The average price at the pump for a gallon of Gasoline in the US is now $3.11 per gallon, a seven year high. Total commercial petroleum inventories in the United States fell again on the week, dropping by 4.6 MB. The price of WTI gained 1.5%, Brent 1.1%, ULSD 1.3% and RBOB 1.5%.

Slightly better than expected unemployment numbers and ongoing concerns regarding the rate of inflation in the US were the primary themes in financial markets this week. The DJIA gained 1%, the S&P 1.7% and the NASDAQ 1.9% as major stock indices, driven by the pressure of inflation, have ascended to near record highs. The markets will be closed on Monday for Independence Day in the US. The dollar index settled the week slightly higher at 92.24. Gold was also up slightly on the week, settling at $1,783.30 per ounce.


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Saudi Arabia and Russia, the two leaders of the OPEC and non-OPEC factions of the OPEC+ agreement, backed a plan to increase production by 400 KBPD starting in August once the scheduled increases of 400 KBPD for July were in place. The UAE raised objections to this agreement, threatening the group's cohesion by claiming that the original reference point for their production allocations dating back to April 2020 is unfairly skewed to their disadvantage. The baseline correction they are seeking would add a substantial 681 KBPD to their output thus diminishing the disciplined effect of the current participants to the agreement. Should the UAE insist on this course and fail to move from their position, orderly production increases would be jeopardized. It is unclear how the coalition of 23 nations that are party to this agreement will respond to the position of the UAE as talks resume in Vienna tomorrow.

Separately, total global production of Crude in June based on an independent assembly of shipping data appears to have risen by nearly 700 KBPD, a figure that is lagging behind current global demand increases.

A sharp rebound in refined product demand in India, recently befallen by an increase in COVID-19 cases due to a particularly virulent strain, has emerged. Diesel sales which normally account for more than half of the country's overall petroleum consumption increased by slightly more than 13% in the month of May. Gasoline demand increased by more than 20% in the same time frame. These increases in refined product consumption have led to a sharp rise in refinery utilization rates in India which had fallen by nearly 8% in the middle of the second quarter of this year.

US Crude inventories fell for a sixth consecutive week and eighth in 10, dropping by 6.718 MB. US Crude stocks remain at 6% below their five-year average and are 81.2 MB below levels of last year at this time. The price of WTI gained $1.14 on the week. Inventories in the three PADDs affected by trans-Atlantic trade fell by 7.463 MB. Inventories in PADD 3, the US Gulf Coast, again fell by a disproportionately large 4.933 MB. Continued high utilization rates and a reduction in imports by 537 KBPD, the first such drop in four weeks, largely contributed to the reduction in stocks. Inventories at the Nymex delivery point of Cushing OK fell for a third consecutive week, dropping by 1.460 MB. WTI levels are now 23% below levels of last year at this time and have reached their lowest levels since March of 2020. Refinery utilization rates nationally increased by 1% to 92.9% of capacity. Utilization rates have now risen for six of the last seven weeks. The WTI/Brent spread, reflecting the limited flow of imports cited above, is now at its narrowest level in 10 months. Despite this, exports remain relatively elevated at 3.7 MBPD. The past week marked the first week since October 2018 that WTI prices closed over $75. We expect refinery utilization rates to remain near unchanged. We further expect imports to ease slightly based on current shipping data and expect no changes in domestic production levels. We therefore anticipate US Crude inventories in the coming week will fall by 5.5 to 6.0 MB.

US Gasoline inventories increased for a fourth week in five, rising by 1.522 MB. US Gasoline inventories are now right at their five-year average and are 14.9 MB below levels of last year at this time. The price of RBOB gained 359 points on the week. Inventories in the three PADDs affected by trans-Atlantic trade gained by 2.042 MB. The increase was most pronounced in PADD 1, the US Atlantic, where stocks increased by 1.807 MB. Inventories in the PADD 1 subsection that encompasses New York Harbor, the Nymex delivery point, increased by 129 KB. This occurred despite a reduction in imports, as we anticipated, of 50 KBPD to a level of 790 KBPD. Imports have now fallen from their five-year average and are likely to ease further next week, based on current shipping data, before likely leveling off in the week thereafter. At this time, we see limited negative impact on demand as the price at the pump stands at a seven-year high. With expectations of no change in refinery utilization, a slight reduction in imports and a probable increase in demand linked to the 4th of July weekend, we expect Gasoline inventories will fall in the week ahead by 1.5 to 2.0 MB.

US Distillate inventories fell for a second week in five, dropping by 869 KB. US Distillate stocks are now 5% below their five-year average and are 37.0 MB below levels of last year at this time. The price of ULSD gained 226 points on the week. Inventories in the three PADDs affected by trans-Atlantic trade fell by 639 KB. The reduction was most pronounced in PADD 3, the US Gulf Coast, where stocks fell by 760 KB. Inventories actually increased in PADDs 1 and 2. The reduction of inventories in PADD 3 was due, in part, to what had been a tightening shipping market. Recent increases in LNG demand in both Europe and Asia have enabled the arbitrage for naphtha to flow from the US Gulf to both Europe and Asia which has competed with Distillate exports thus resulting in higher freight rates. Looking ahead, we expect demand, currently at 4.170 MBPD after a rise of 223 KBPD, to fall in the week ahead to more seasonal levels. Lower demand and static production should result in inventories being near unchanged in the coming week.

As expected, Crude structure increased significantly in the past week. We find it difficult to construct a scenario where Crude stocks will build in the US given the state of the WTI / Brent spread. Non-commercial speculative length in Petroleum futures is at a 30-month high. The UAE’s position in the OPEC+ agreement is cause for concern though. The nature of the resolution of this issue will dictate price direction in the week ahead.

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