Market Summary: August 22, 2021

Petroleum prices plunged more than 8% this week, their largest weekly loss in more than nine months. Prices have fallen for seven consecutive days and are at their lowest level since May 20th. The last time WTI fell for seven consecutive trading days was in September 2019. The last time Brent fell for seven consecutive days was in February 2018. On the week, WTI fell more than 9%, Brent 8%, RBOB 10% and ULSD 8%. A sharp global resurgence in the delta variant of the Covid-19 virus depressing demand, pressure from significant releases from China and India’s Strategic Petroleum Reserves and significant gains in the dollar all weighed heavily on petroleum prices. Despite this week's dramatic reduction in prices, total commercial petroleum inventories in the US actually fell by 5.298 MB.

The likelihood of diminishing stimulus from the Federal Reserve helped propel equities lower. On the week, the Dow lost 1.1%, the S&P 0.6% and the NASDAQ 0.7%. The dollar reached nine-month highs as the Federal Reserve stated it will soon curtail stimulus by tapering purchases of its own bonds. The dollar index increased sharply on the week, rising by 0.96 to settle at 93.46. Gold prices briefly penetrated $1,790 per ounce but eased to settle near unchanged at $1,782.60 per ounce.

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The Atlanta-based CDC has calculated a seven-day moving average for new COVID-19 cases in the US at slightly more than 133,000, a level last seen in February. Cases reported on August 18th alone in the US totaled more than 157,000. A significant slowdown on workers returning to offices has been measured as a number of large companies have virtually stalled their return-to-work programs. The sum total of these policies will result in less commuting and lower Gasoline demand in the US.

Protocols enacted for containment of COVID-19 have slowed port activity in China significantly. Chinese Crude refinery utilization rates stand at 14-month lows and are linked to poor refinery output and retail sales figures there. China had announced last week its intention to release 29.3 MB of Crude from its Strategic Petroleum Reserve.

India announced that it would release more than 37 MB from its Strategic Petroleum Reserve as COVID-19 cases grow in significance. On a month-to-month basis, retail sales of Distillate in India fell by more than 15% while Gasoline sales fell by 4.93%.

A number of global travel restrictions have been reimposed. Parts of the EU and large swaths of Asia are seeing a significant reduction in scheduled flights. A severe reduction in road traffic throughout Southeast Asia has also occurred.

OPEC+ has not changed its policy for gradual monthly increases in Crude supplies. The group is scheduled to meet on a virtual basis in Vienna on September 1st. OPEC+ production discipline remains strong as compliance in the month of July stood at 109%.

US Crude inventories fell for the 11th week in 13, dropping by 3.233 MB. Crude stocks remain 6% below their five-year average and are now 77 MB below levels of last year at this time. The price of WTI fell by $6.12 on the week. US Crude stocks stand at their lowest levels since January of 2020. Inventories in the three PADDs affected by trans-Atlantic trade fell by 3.156 MB. The reduction was again most significant in PADD 2, the US midcontinent, where stocks fell by 2.239 MB. Inventories in Cushing OK, the Nymex delivery point which is encompassed by PADD 2, fell by 980 KB. Inventories at Cushing are now at their lowest level since October 2018 and have fallen for ten consecutive weeks. Crude imports remained near unchanged, falling by only 46 KBPD to a level of 6.35 MBPD. US Crude exports increased slightly, rising by 768 KBPD to reach a level of 3.4 MBPD. This growth was facilitated by the continued weakening of the WTI/Brent spread. Shipping data indicates Crude imports to the US should remain near unchanged in the coming week. We expect utilization rates to fall slightly in the week ahead and expect Crude exports to maintain their current levels. As a consequence, we expect Crude inventories to fall by 1.5 to 2.0 MB in the week ahead.

US Gasoline inventories gained for the first week in five and fifth week in 11, rising by 696 KB. US Gasoline inventories remain 3% below their five-year average and are 15.6 MB below levels of last year at this time. The price of RBOB fell by 2390 points on the week. Inventories in the three PADDs affected by trans-Atlantic trade fell by 349 KB. The reduction was most pronounced in PADD 1, the US Atlantic, where stocks fell by 2.914 MB. Inventories grew significantly in both PADDs 2 and 3. Inventories in the PADD 1 subsection that encompasses New York Harbor, the Nymex delivery point, fell by 1.290 MB. This reduction was facilitated by a lower flow of imports which fell by 182 KBPD to a level of 743 KBPD. Shipping data indicates this flow will remain at or below this level next week. There was a minor reduction in demand of 97 KBPD to a level of 9.333 MBPD. It is now apparent that peak demand for Gasoline this summer occurred during the 4th of July weekend. Demand has now fallen for three consecutive weeks and is starting to reflect, in part, an impact from increases in COVID-19 cases. Lower imports, lower production from lower utilization rates and diminished demand expectations should result in Gasoline inventories being within 500 KB of unchanged in the coming week.

US Distillate inventories fell for the first week in three and fifth in 12, dropping by 2.697 MB. Distillate inventories are now 8% below their five-year average and are 40 MB below levels of last year at this time. The price of ULSD fell by 1697 points this week. Inventories in the three PADDs affected by trans-Atlantic trade fell by 2.391 MB. A small gain in PADD 1 was offset by a small loss in PADD 2 and a significant reduction in PADD 3 of 2.874 MB. The reduction in PADD 3 is likely to continue in the week ahead as a major refinery outage in Colombia has already started to tighten freight rates from the US Gulf which will probably lead to a significant increase in exports from the current level of 1.052 MBPD. The demand figure for just this past week was reported at 4.323 MBPD, an increase of 589 KBPD from the previous week. This figure strikes us as curiously high, particularly due to the fact that the export flows cited above were not significant in change from their previous week. We therefore expect demand in the US to ease in the week ahead. This drop in demand and probable easing in refinery utilization will be offset by increased exports as cited earlier. As a consequence, we anticipate Distillate inventories will fall further in the week ahead by 2.5 to 3.0 MB.

This week's price plunge was exceptional and quite surprising given the relatively minor impact the delta variant was thought to have in the week prior. It now appears that demand reduction due to COVID-19 resurgence is significant and may last for some time. Very long-term key moving averages are being approached in Crude prices. A price recovery from being oversold is likely at some point in the week ahead. An avowed reduction of scheduled production increases from OPEC+ is likely the only circumstance that would put a floor on outright values.

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