Petroleum prices ended the week mixed as the monthly IEA report warned of slowing demand growth linked to the ongoing resurgence of COVID-19 delta variant cases which reached six-month highs in the US. OPEC in its monthly report left its demand growth expectations unchanged though warned of increasing output growth from non-OPEC+ participants, led by shale producers in the United States. Increasing signs of sharp changes in policy in China that will alter the flow of petroleum to and from that country served to further temper price growth. These largely negative features were offset in part by the fact that total commercial petroleum stocks in the US fell by 1.88 MB on the week, adding to the broader measure of overall commercial stock reductions in the US that have fallen by 13% since March. Commercial inventories in the OECD dropping at a rate of 1.32 MBPD in the last month served to further temper price weakness. On the week, WTI gained 0.2%, Brent lost 0.2%, RBOB gained 0.3% and ULSD lost 0.3%.
Major U.S. equity indexes were also mixed. On the week, the Dow gained 0.9% and the S&P 0.7% while the NASDAQ lost 0.1%. The dollar index fell slightly by 0.26 to settle at 92.52. Conversely, gold increased on the week by $17.80 to settle at $1,781.50 per ounce.
The Paris-based IEA, OPEC and the US government-based EIA all released their monthly reports on Thursday.
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The Paris-based IEA cut its global oil consumption forecasts sharply, stating that global Crude demand had effectively come to a halt in the month of July. The report went on to state that the pace of future increases in demand for the balance of 2021 will slacken due to the ongoing effects of the delta variant of the COVID-19 virus. The report stated specifically that “growth for the second half of 2021 has been downgraded more sharply as new COVID-19 restrictions imposed by several major oil consuming countries, particularly Asia, looks set to reduce mobility and oil use.”
OPEC stuck with its previous demand expectations from last month's report yet added the likelihood of increased production from non-OPEC+ agreement participants, particularly shale producers in the United States, as leading to a slight rise in overall global supplies.
The US-based EIA left its projections essentially unchanged though did cite the possibility of a slight reduction in global Crude production.
Two major U.S. investment banks see demand stagnation or even a slight reduction in demand but expect it to be somewhat short lived.
China expects a sharp reduction in demand due to the delta variant of COVID-19. Quotas for refined product exports have been lowered dramatically. Large-scale releases from China's vast Strategic Petroleum Reserve have been ordered. Some estimates for the release of reserves are as high as 29.3 MB. In the recent past, China had eliminated import quotas for smaller independent refineries thus easing significant import burdens.
US Crude inventories fell for the 10th week in 12, dropping by 448 KB. Crude stocks remain 6% below their five-year average and are now 75.3 MB below levels of last year at this time. The price of WTI fell by $0.23 on the week. Inventories in the three PADDs affected by trans-Atlantic trade fell by 1.073 MB. The reduction was most significant in PADD 2, the US mid-continent, where stocks fell by 1.262 MB. Inventories in Cushing OK, the Nymex delivery point, which is encompassed by PADD 2 fell by 325 KB to their lowest levels since early November of 2018. Crude imports remained near unchanged, only dropping by 36 KBPD to a level of 6.396 MBPD. Imports remained somewhat static and are approximately 2.66 MBPD on a rolling four-week average basis. Refinery utilization rates increased nationally by 1% on the week. This figure is likely to remain near unchanged in the week ahead. No change in utilization rates, static production levels which had increased by 100 KBPD to a level of 11.3 MBPD and no appreciable changes in export or import flows should render US Crude inventories lower by 500 KB to 1.0 MB in the coming week.
US Gasoline inventories fell for a fourth consecutive week and sixth in the last 10, dropping by 1.401 MB. US Gasoline inventories are now 3% below their five-year average and are 19.6 MB below levels of last year at this time. National Gasoline inventories are at their lowest levels since the week of November 6th . The price of RBOB gained 116 points on the week. Inventories in the three PADDs affected by trans-Atlantic trade fell by a somewhat limited 567 KB. The drop was most pronounced in PADD 2, where stocks fell by 1.487 MB. Though stocks gained by 413 KB in PADD 1, the US Atlantic, stocks in the PADD 1 subsection that encompasses New York Harbor, the Nymex delivery point, fell by 1.1 MB. This occurred despite an increase in imports of 80 KBPD to a level of 925 KBPD. Shipping data indicates a substantial reduction in the flow of imports in the week ahead, possibly by as much as 250 KBPD. This, coupled with a possible increase in demand from current levels of 9.43 MBPD, may well result in a significant reduction in Gasoline inventories. As a consequence, we expect Gasoline stocks in the US to fall by 2.0 to 2.5 MB in the week ahead.
US Distillate inventories gained for a second consecutive week and seventh week in 11, rising by 1.767 MB. Distillate inventories are still 6% below their five-year average and are 37.2 MB below levels of last year at this time. The price of ULSD fell 145 points on the week. Inventories in the three PADDs affected by trans-Atlantic trade gained by 1.515 MB. The gain was disproportionately large in PADD 3, the US Gulf Coast, where stocks increased by 2.837 MB. An increase in refinery utilization rates and a slight reduction in exports to a level of 1.302 MBPD facilitated such gains. Shipping data indicates a reduced flow of exports in the week ahead by as much as 75 KBPD to a level that may well be below 1.25 MBPD. National demand stands at 3.734 MBPD, a gain of 116 KBPD on the week. This number seems unusually high for this time of year amid still limited agricultural demand. As a consequence, with a likely reduction in exports, unusually high demand and refinery utilization rates being near unchanged, we expect Distillate inventories to increase in the coming week by 2.0 to 2.5 MB.
As it is August, it is likely that the direction of Gasoline cracks will largely determine outright price direction. As stated above, we see the possibility for additional demand in Gasoline and as a consequence the possibility for some short-term price support. Structure in both Crude streams appears rather weak in the prompt months which may result in Crude price erosion. We will assume that the market may well hover near unchanged in the near term.