Market Summary: July 18, 2021

Petroleum prices dropped for a second consecutive week and second in eight, falling by the largest amount since the week of March 26th. Prices did recover slightly on Friday. The resurgence of the COVID-19 virus with the emerging Delta variant, relatively soft inventory numbers that showed significant reductions in refined product demand in the week after the 4th of July holiday and what appeared to be lack of resolution among participants to the OPEC+ agreement all served to weigh on prices. OPEC will reconvene today to apparently re-establish an agreement now that the differences between Saudi Arabia and the UAE have been addressed. Total commercial petroleum inventories in the US gained by 2.5 MB. On the week, WTI fell by 3.7%, Brent 2.6%, RBOB 1.7% and ULSD 1.9%.

Weakening consumer sentiment overshadowed recent concerns regarding inflation as equity indexes in the US eased. On the week, the S&P fell by 1%, the Dow 0.5% and the NASDAQ 1.9%. The dollar index increased as energy prices declined, settling at 92.71, a gain of .50 on the week. Gold prices increased for a fourth consecutive week, rising by $1.90 per ounce to settle at $1,812.50 per ounce.


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Saudi Arabia and the UAE have apparently reached an agreement in which the UAE will achieve an increase in output of 482 KBPD, some 199 KBPD short of their originally requested 681 KBPD. Since this disagreement emerged from discussions among OPEC+ members, volatility has increased substantially as the market in the immediate aftermath of reporting the disagreement reached six-year highs before prices dropped below $72 at the end of this week. The acceptance of this bilateral agreement among all 23 participants to the OPEC+ pact is not assured but is considered by a number of analysts as highly likely.

OPEC issued a report this week stating that global demand would exceed pre-pandemic levels in 2022. The report maintains demand growth for 2021 will stand at 5.9 MBPD which reflects an increase in demand of 6.6%. Demand is expected to increase by an additional 3.4% in 2022. The cartel expects the call on OPEC Crude to increase by 1.1% in 2022.

The stubborn remnants of COVID-19 and the recent increase in cases from the Delta variant continue to weigh disproportionately on India. A report released early in the week showed Crude imports to India at nine-month lows in the month of June. The largest refinery group in the country has seen refinery utilization, normally at or near 100% capacity at this time of year, only reach 84%. Though Gasoline demand in the month of June is 3.4% higher than levels of the previous June, demand is estimated to have fallen by 7% from the one-year highs reached in the preceding month of May.

US Crude inventories fell for an eighth consecutive week and 10th in 12, dropping by 7.896 MB. US Crude stocks are now 8% below their five-year average and are 94.1 MB below levels of last year at this time. The price of WTI fell by $2.75 on the week. Inventories in the three PADDs affected by trans-Atlantic trade fell by 6.798 MB. Inventories in PADD 3, the U S Gulf Coast, again fell by the largest amount, dropping by 5.346 MB. This occurred despite an increase in imports for the first week in three of 346 KBPD to a level of 6.221 MBPD. The largest influence on this week’s reductions in inventories was a significant growth in exports of 1.4 MBPD to a level of 4.0 MBPD, well above five-year highs. This occurred despite the WTI/Brent spread remaining relatively narrow which would normally inhibit heightened export flows. Inventories in Cushing OK, the Nymex delivery point, fell for a fifth consecutive week, dropping by 1.589 MB. This reduction is due in large part to increased import flows as well as relatively high utilization rates which were unchanged on the week at 91.8% of capacity. Looking ahead we see production which increased by 100 KBPD this week to a level of 11.4 MBPD, its highest level since May 2020, as stable in the week ahead. We also see refinery utilization rates remaining near unchanged. Shipping data does indicate a slight reduction in the flow of exports which leads us to believe that US Crude inventories in the US will drop in the coming week by 3.0 to 3.5 MB.

US Gasoline inventories gained for the fifth week in seven, rising by 1.038 MB. US Gasoline inventories are now 1% below their five-year average and are 12.0 MB below levels of last year at this time. The price of RBOB fell by 384 points on the week. Inventories in the three PADDs affected by trans-Atlantic trade gained by 1.208 MB. The increase was most pronounced in PADD 2, the US midcontinent, where stocks grew by 773 KB. Inventories in the PADD 1 subsection that encompasses New York Harbor gained 572 KB on the week. This gain in the northeast is largely attributable to an increase in imports of 28 KBPD to a level of 1.044 MBPD, an exceptionally high rate of imports. Shipping data which has shown a reduction in rates for voyages from northwest Europe to the US East Coast indicates a likely reduction in imports in the week ahead by as much as 200 KBPD. The likelihood of a limited change in production and demand which fell by 760 KBPD in the week after the 4th of July holiday as well as a drop in imports lead us to believe that Gasoline inventories will remain within 500 KB of unchanged in the week ahead. US Distillate inventories gained for the fifth week in seven, rising by 3.657 MB. US Distillate inventories are now 4% below their five-year average and are 34.5 MB below levels of last year at this time. The price of ULSD fell by 419 points on the week. Inventories in the three PADDs affected by trans-Atlantic trade increased by 3.638 MB. Similar to Gasoline, the increase was most significant in PADD 2, the US midcontinent, where stocks increased by 1.757 MB. Export flows, now at 1.2 MBPD, are likely to ease as freight rates have softened amid growing vessel availability. Distillate demand, similar to Gasoline, also fell significantly, dropping by 676 KBPD to a level of 3.164 MBPD. We expect demand to recover as current demand levels appear almost artificially low. The anticipated increase in demand, stable production and a slight reduction in exports should result in Distillate inventories also remaining within 500 KB of unchanged in the coming week.

Despite a reduction in demand, the strength in the relative value of Gasoline has provided some level of price support in a weakening market. Near term demand reductions linked to spikes in cases of the COVID-19 Delta variant should remain temporary and result in demand increases as projected by both the IEA and OPEC this week. The perception of the agreement between Saudi Arabia and the UAE and the reaction of other participants to the OPEC+ agreement in the aftermath of today's meeting, both stated and measured in production behavior, will determine the outright direction of the market. We suspect the outcome will be positive due to the fact that the discord caused by the rift between Saudi Arabia and the UAE was brief and that the other 21 participants to the agreement will realize how quickly prices can soften if production discipline is lost.

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