Market Summary: August 1, 2021

Petroleum prices gained for a second week in four and ended July positive for a fourth consecutive month. Easing concerns regarding the delta variant of the COVID-19 virus, an ongoing and accurate perception of an expanding global supply deficit, price constructive weekly statistics, an increase in geopolitical tensions associated with Iranian behavior, compliance among OPEC pact participants and US Crude stocks standing at their lowest level since the week of January 31, 2020 were the key drivers for this week's price gains. WTI gained 2.6%, Brent 3.0%, RBOB 3.26% and ULSD 3% in a week that saw overall US commercial stocks fall to their lowest levels in more than 19 months.

Near record low bond yields and a deteriorating U.S. dollar were leading factors in reduced values in all major US equity indexes. On the week, the Dow and the S&P lost 0.4% and the NASDAQ 1.1%. The dollar index fell by 0.8%, dropping to 92.09, a reduction of 0.82 on the week. Gold prices increased on the heels of a weakening dollar, rising by 0.9% on the week to settle at $1,816.90 per ounce.


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A number of drones targeted the Crude tanker Mercer St. in the Arabian Sea off the coast of Oman on Thursday evening, killing two crew members. Iran is widely believed to be responsible for the attack. The US Navy's fifth fleet was shadowing the ship operated by an Israeli shipping group when the attack occurred. This was the deadliest attack on commercial shipping in more than three years. Increasing pressure from the US on China regarding their ongoing heavily discounted purchases of Iranian Crude may have contributed to the escalation of tensions as the newly elected Iranian president, clearly more militant than his predecessor, has increased bellicose rhetoric regarding the rapidly crumbling JCPOA talks in Vienna.

July compliance among the members of the 23-nation OPEC+ pact stood at 115% in July, according to preliminary reports gleaned from independent shipping data. Compliance for the month of June had been estimated at 118%. Static Iranian output, linked in part for reasons cited above, aided in limiting the balance of global supplies.

The CFTC reported a significant reduction in non-commercial length in petroleum futures this last week. Commercial length fell by more than 172 MB, the largest weekly decrease since July 2018 and the 6th largest weekly drop recorded in the last 430 weeks. Though it is reasonable to expect that this reduction involved profit-taking to a significant extent, previously held concerns over demand destruction linked to the delta variant of the COVID-19 virus, something the market has subsequently discounted, may lead to a sharp upward price reversal in the coming week with growth in noncommercial length likely.

US Crude inventories fell for a ninth week in 10, dropping by 4.089 MB. US Crude stocks remain 7% below their five-year average and are 90.4 MB below levels of last year at this time. The price of WTI gained $1.84 on the week. Inventories in the three PADDs affected by trans-Atlantic trade gained by 104 KB. Increases in PADDs 1 and 3 were almost offset by a significant reduction in inventories in PADD 2, the US mid-continent, of 453 KB. Inventories in the mid-continent are now at their lowest level since October 2018. The large national reduction was primarily fed by a reduction of 3.839 MB in the geographically isolated PADD 5, Pacific region. Inventories at Cushing OK, the Nymex delivery point, encompassed by the midcontinent PADD 2, saw stocks fall to their lowest level since January of 2020 and are now below pre pandemic levels. The reduction of 1.268 MB in Cushing renders current inventories at 35.443 MB. As expected, US domestic production fell this past week by 200 KBPD to a level of 11.2 MBPD. Further reductions in domestic output are expected as summer maintenance is expected to expand, particularly in Alaska, in the near term. US Crude exports rose slightly, increasing by roughly 25 KBPD. Shipping data indicates no significant change in the flow of exports next week. We expect refinery utilization rates to remain largely unchanged. We further expect domestic production to ease again, possibly by another 200 KBPD. Shipping data appears to indicate imports, currently at 6.507 MBPD, should remain unchanged. We therefore expect Crude inventories to fall by 3.5 to 4.0 MB in the week ahead.

US Gasoline inventories fell for a fourth week in nine, dropping by 2.253 MB. US Gasoline inventories remain at their five-year average and are 13.2 MB below levels of last year at this time. The price of RBOB gained 746 points on the week. Inventories in the three PADDs affected by trans-Atlantic trade fell by 2.717 MB. The drop was most pronounced in PADD 1, the US Atlantic, where stocks fell by 3.182 MB. Inventories in the PADD 1 subsection that encompasses New York Harbor, the Nymex delivery point, fell by a disproportionately large 3.502 MB. This heightened demand in the northeast has been reflected in increasing Gulf Coast values linked to the Colonial Pipeline. As expected, Gasoline imports fell by a substantial 465 KBPD to a level of 909 KBPD. This reduction was largely attributed to the lower inventories in the northeast. The outright price of RBOB reached its highest level this week since October of 2014. We expect the flow of imports to remain somewhat steady as freight costs from northwest Europe have increased. Accordingly, with steady imports, demand likely to remain near unchanged at 9.325 MBPD and utilization rates remaining unchanged, we expect US Gasoline inventories to fall by 2.0 to 2.5 MB in the coming week.

US Distillate inventories also fell for a fourth week in nine, dropping by 2.799 MB. Distillate inventories are now 7% below their five-year average and 40.5 MB below levels of last year at this time. The price of ULSD gained 655 points on the week. Inventories in the three PADDs affected by trans-Atlantic trade fell by 2.799 MB. The reduction was most pronounced in PADD 3, the US Gulf Coast, where stocks fell by 1.736 MB. This figure was reflected in sharply higher freight rates for movements from the US Gulf coast to Europe as well as Central and South America. Distillate demand in the United States increased by 431 KBPD to a level of 4.356 MBPD. Such a weekly demand figure in early August strikes us as unsustainably high. A likely reduction in demand should be offset by a sharp uptick in exports in the coming week. We expect more than 45 ships will be leaving the Gulf Coast in the week ahead. As a consequence, with higher exports largely offsetting a small reduction in demand and with unchanged utilization rates likely, we expect Distillate inventories in the United States to fall by 3.0 to 3.5 MB in the week ahead.

Diminishing concerns regarding the delta variant of COVID-19, ongoing OPEC+ supply discipline, and an increase in geopolitical tensions with Iran regarding Thursday's ship attack as well as the overwhelming fact that US Crude stocks are at their lowest level in 19 months and US Gasoline stocks are at their lowest level in 58 months all should lead to higher prices in the coming week.

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