Market Summary: July 25, 2021

Petroleum prices gained for the first week in three despite opening the week with a 7.5% drop on Monday. The severe drop was due in large part to ongoing concerns of the delta variant of COVID-19 that has been resurgent in a number of countries including the US. Last week, OPEC achieved what it had originally hoped for two weeks earlier as the dispute essentially between Saudi Arabia and the UAE was resolved. Participants to the OPEC+ agreement will continue to increase output by 400 KBPD through 2022. The UAE will have the marker for its output adjusted in August of 2022. After Monday's staggering drop rendering Crude prices to their lowest levels since May, prices increased in each of the last four days of the week. On the week, WTI and Brent gained 0.7%, RBOB 1.7% and ULSD 1.0%. Crude prices were able to maintain the $70 threshold through an exceptionally volatile week.

Mixed economic indices, poorer than expected employment numbers and an ever-increasing supply of U.S. dollars streaming into the economy found refuge in U.S. equity markets. Despite featureless economic news, U.S. stock indices reached new historic highs. On the week, the Dow gained 1.1%, the S&P 2.0% and the NASDAQ 2.8%. The dollar index improved slightly by .20 to settle at 92.91 while conversely gold fell for the first week in five, dropping by 0.7% to settle at $1,801.80 per ounce.

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COVID-19 virus cases in the US are rising again, increasing by 53% on a week-on-week basis according to the Center for Disease Control in Atlanta. The delta variant is responsible for more than 80% of the new cases reported. The rate of increase in COVID cases in the US is not quite as severe as other developed countries as inoculation percentages elsewhere are slightly lower. The impact of the increase in cases has yet to be clearly reflected in demand levels. In the US, demand for Gasoline increased on the week by 12 KBPD and Distillate demand increased by 761 KBPD. Though such figures don't specifically reflect the severity of very recent increases in COVID, overall petroleum stocks in OECD countries continue to fall, having dropped by 27 MB in the month of June. This figure, when weighed against the ongoing production discipline of OPEC+ participants, evinces an ongoing reduction in global inventories. A number of investment banks as well as OPEC and the Paris-based IEA continue to project such reductions despite the recent spike in infections.

The trajectory of increases in Crude demand from China is expected to soften slightly in the future as a number of smaller refineries are likely to curtail their acquisition of foreign Crude based on alterations in refining policy as set by the government. Demand growth is expected to continue however as June refinery utilization in China reached a record level of 14.8 MBPD. The government of China is pondering the release of Crude reserves as well as reserves in other key commodities in an attempt to quell the adverse effects of inflation.

US Crude inventories gained for the first week in nine and third in 13, rising by 2.107 MB. US Crude stocks are now 7% below their five-year average and are 96.9 MB below levels of last year at this time. The price of WTI fell by $0.26 on the week. Inventories in the three PADDs affected by trans-Atlantic trade gained by 27 KB. Significant growth in PADD 3 of 1.9 MB was more than offset by a large draw in inventories in the mid-continent of 2.231 MB. The national reduction in Crude inventories essentially occurred in the two PADD districts that are not affected by trans-Atlantic trade. Growth in Crude stocks in PADDs 4 and 5 totaled 2.081 MB. The significant reduction in inventories in PADD 2 is attributable in part to limited flows from Canada and continued reduction in Cushing inventories. Inventories in Cushing OK fell by 1.347 MB. Stocks at the Nymex delivery point have fallen by more than 22 MB since January. This reduction has been fed by higher regional utilization rates, limited flows from Canada and ongoing Crude export demand from the US. US domestic production remained unchanged at 11.4 MB. August maintenance of production fields, particularly in Alaska, is expected in the coming weeks. The increase in the flow of Crude imports by 876 KBPD to 7.097 MBPD, the highest such level since July 2020, was the key feature in causing overall Crude stocks to rise. We do not consider this figure sustainable and shipping data substantiates a likely reduction in the flow of imports in the week ahead. The sharp reduction in imports and likely limited change in US production and refinery utilization should result in Crude inventories falling in the coming week by 2.0 to 2.5 MB.

US Gasoline inventories fell for the third week in eight, dropping by 121 KB. US Gasoline inventories are now at their five-year average and are 10.3 MB below levels of last year at this time. The price of RBOB gained 377 points on the week. Inventories in the three PADDs affected by trans-Atlantic trade fell by 752 KB. The drop was most pronounced in PADD 1, the US Atlantic, where stocks fell by 960 KB. Inventories in the PADD 1 subsection that encompasses New York Harbor, the Nymex delivery point, fell by 456 KB. This reduction was most conspicuous as US Gasoline imports reached record high levels of 1.374 MBPD. These historically high imports were absorbed by demand that remains resilient, having risen by 12 KBPD in the last week which now stands at 9.295 MB. Shipping data indicates a significant reduction in imports in the week ahead of as much as 350 KBPD. This, and resilient demand despite the average national price at the pump now being $3.155 per gallon should enable Gasoline inventories to fall in the week ahead by 2.0 to 2.5 MB.

US Distillate inventories also fell for a third week in eight, dropping by 1.349 MB. Distillate inventories remain 4% below their five-year average and are now 36.9 MB below levels of last year at this time. The price of ULSD gained by 206 points on the week. Inventories in the three PADDs affected by trans-Atlantic trade fell by 866 KB. The reduction was also most pronounced in PADD 1, the US Atlantic, where stocks fell by 839 KB. Inventories in PADD 2, the mid-continent, fell by 519 KB while inventories in PADD 3, the US Gulf Coast, increased by 492 KB. The increase in PADD 3 was largely attributable to a very slight reduction in exports. Shipping data indicates a slight increase in exports in the week ahead by as much as 120 KBPD. Overall Distillate demand in the United States increased by 761 KBPD to a level of 3.925 MBPD, a figure that is not likely sustainable given the time of year. Even with a slight reduction in demand, the increase in exports next week should enable Distillate inventories to fall further. We expect Distillate inventories to fall by 1.5 to 2.0 MB in the week ahead.

We expect outright prices to remain volatile in the coming week with a slight upward bias. Any information related to diminished demand linked to COVID-19 increases will increase volatility and drive prices lower though it appears unlikely that such data would be of any measurable significance in the near term.

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