In a stunning reversal, petroleum prices recovered all of last week's price plunge plus an additional 2 to 3%. Diminishing COVID-19 concerns and clear signs of recovering demand from the US, China and India, further aided by a weakening dollar, were the key drivers propelling prices higher. Total commercial petroleum inventories in the United States fell by 5.298 MB. On the week, WTI gained 10%, Brent 11%, RBOB 12% and ULSD 10%. At the time of this writing, Hurricane Ida is rapidly intensifying as it approaches the state of Louisiana with expected wind speeds of greater than 140 MPH, threatening significant production and refining assets.
An alarming increase in the annual rate of inflation according to data released from the Department of Commerce was a key feature affecting financial markets. U.S. equity indexes increased on the week. The Dow gained 1.0%, the S&P 1.5% and the NASDAQ 2.8%. The dollar index fell sharply, dropping by 0.88 to 92.68. The price of gold rose significantly, gaining more than $37 to settle at $1,820.50 per ounce.
China reopened Ningbo port this week after nearly two weeks of closure due to attempts to control the spread of the delta variant of the COVID-19 virus. Travel restrictions are still in place throughout China and are expected to be phased out gradually in the coming weeks.
In response to rising demand, Indian refineries have increased refinery utilization rates by 1.75% over the last four weeks to their highest level in three months. This has effectively negated the recent downturn in utilization as well as refined product demand that had been linked to COVID-19 resurgence.
A fire that killed five workers at an offshore rig has taken 421 KBPD of Mexican production offline. There has been no timetable set for repairs and recovery of output.
Up to 300 KBPD of production in Libya is likely to go offline in the coming week as budget battles among governing factions in Libya are intensifying.
Countries that are party to the OPEC+ agreement will meet in Vienna on Wednesday and are expected to maintain their current agreement which allows for an increase of production of 400 KBPD in the coming month.
As Hurricane Ida approaches the state of Louisiana as a category four hurricane with winds expected to reach as high as 145 mph, 1.64 MBPD of Crude production and 17 refineries with 3.4 MBPD of capacity are under threat. Platform evacuations and other preparations linked to the storm have been apace since mid-week.
US Crude inventories fell for a third consecutive week and 12th in 14, dropping by 2.980 MB. Crude stocks remained 6% below their five-year average and are 75.2 MB below levels of last year at this time. The price of WTI gained $6.42 on the week. US Crude stocks stand at 19 month lows. Inventories in the three PADDs affected by trans-Atlantic trade fell by 2.4 MB. The reduction was most significant in PADD 3, the US Gulf Coast, where stocks fell by 1.42 MB. This was linked to a small increase in refinery utilization to 92.4% of capacity and a consistent flow of exports of 2.812 MBPD. Crude imports also fell, dropping by 193 KBPD to 6.157 MBPD. Inventories at Cushing OK, the Nymex delivery point, gained for the first week in 11, rising by 70 KB. Inventories at the Nymex delivery point of Cushing are still 30% below their five-year average. Projections of petroleum inventory changes in advance of a very dangerous storm are to be taken with a large grain of salt. In the hopes that damage is minimal to both production and refining assets in Louisiana, we would expect imports to remain relatively low due to the still broad differential in favor of Brent in WTI/Brent spreads and expect utilization rates to increase. This would result in a further drop in US Crude inventories similar in scope to this week, provided no damage were to occur from Hurricane Ida.
US Gasoline inventories fell for a fifth week in six, dropping by 2.241 MB. Gasoline inventories are 3.2% below their five-year average and are 13.3 MB below levels of last year at this time. The price of RBOB gained 2506 points on the week. National Gasoline inventories are at their lowest levels since November of 2020. ARA stocks, reflecting European demand, are at their lowest levels since late October 2016. PADD 1 stocks are at their lowest levels since March 2020. Inventories in the three PADDs affected by trans-Atlantic trade fell by 2.236 MB. The reduction was most pronounced in PADD 1, the US Atlantic, as the nearing end of summer driving season is accentuated by vacations and students returning to universities, the combination of which leads to exceptional demand that did increase by 239 KBPD to a level of 9.572 MBPD, its highest level since July. Inventories in the PADD 1 subsection that encompasses New York Harbor, the Nymex delivery point, fell by 665 KB to a level of 26.942 MB. This reduction occurred despite a significant increase in imports of 330 KBPD to a near historic high of 1.076 MBPD. Shipping data indicates a further increase in the flow of imports next week that could reach record high levels in excess of 1.2 MBPD. If the impact of Hurricane Ida is limited, we would expect Gasoline inventories to fall in the week ahead by 1.0 to 1.5 MB.
US Distillate inventories gained for the third week in four, rising by 645 KB. Distillate stocks are now 8% below their five-year average and are 40.7 MB below levels of last year at this time. The price of ULSD gained 2010 points on the week. Inventories in the three PADDs affected by trans-Atlantic trade gained by 520 KB. Another small gain in PADD 1 of 845 KB was offset by small reductions in PADDs 2 and 3. The reduction of inventories in PADD 3 of 276 KB should reverse in the week ahead as the flow of exports is likely to increase to a level of approximately 1.3 MBPD. As expected, demand fell by 219 KBPD to a level of 4.104 MBPD. We expect that demand figure to ease for another week before agricultural needs emerge. With no impact from the hurricane, we would expect Distillate inventories to remain near unchanged in the week ahead as a probable loss in demand would be offset by the likely increase in exports.
US Crude stocks are at 19 month lows. US Gasoline stocks are at 20 month lows. 3.4 MBPD of refining capacity is at risk in the US Gulf due to the threat of Hurricane Ida. In the past when hurricanes have severely damaged refining assets, FFAs for the TC2 voyage from Amsterdam to New York for Gasoline have spiked. That market segment has increased over the last week and is likely to rise further on pure speculation in the early part of this week. Fundamentally, Gasoline should perform well against Crude, particularly WTI, if the storm were to inflict some measure of damage. If there were no storm to contend with, market circumstances appeared to be clarifying as volatile and rangebound with a slight upward bias. Volatility can be assessed by the extreme optimism for price increases in the coming week versus the extremely depressed tone of last week after seven consecutive days of falling prices.