The likely growing impact on demand from a serious resurgence of the delta variant of COVID-19 propelled petroleum prices to their largest weekly drop since the week of October 2nd , 2019. Reinstituted restrictions particularly in China, the focal point of global demand growth, propelled Crude prices below $70 per barrel. A stronger dollar and growth in US Crude inventories further aided price declines. On the week, WTI lost 7.7%, Brent 6.3%, RBOB 3.3% and ULSD 5.1%. Despite an overwhelmingly bearish week, there is a growing undercurrent of concern regarding an increase in hostilities in the Middle East as Iran may have attacked a second commercial vessel.
A surprising improvement in unemployment numbers which raised the notion that the Federal Reserve would curb its de facto stimulus behavior resulted in improvements in US equity indexes. On the week, the Dow gained 0.8%, the S&P 0.9% and the NASDAQ 1.1%. The dollar index, driven by reasonable speculation on the behavior of the Federal Reserve, rallied to end the week at 92.78, an improvement of 0.69. Dollar strength enabled gold prices to tumble, settling at $1,763.70 per ounce, falling by $53.20 per ounce on the week.
COVID-19 cases in China have jumped to a six-month high. Transportation is being affected as road traffic currently stands at 70% of its normal levels. Public transportation systems have been scaled back or completely closed in up to 46 cities. Domestic flights within China have also been severely curtailed. July imports of Crude in China fell to a seven-month low of 9.21 MBPD. Though China recently altered the issuance of import permits, severely affecting the flows of smaller independent refineries, Chinese Crude imports in the first seven months of this year were only 10.39 MBPD, a figure well below what was perceived to be post COVID-19 expectations. China had recently announced plans to release inventories from their Strategic Petroleum Reserve as a means of targeting inflation in the hopes of capping recent price advances. COVID-19 cases elsewhere in Asia have also re-emerged. Record resurgence in cases have occurred in Thailand, Malaysia and the Philippines. A significant resurgence has also been noted in Australia, particularly in the metropolitan area of Sydney.
Compliance to the OPEC+ agreement has fallen to 106.09%, the lowest percentage since January. Russia is currently producing 9.64 MBPD, a figure above their quota. Production among OPEC members within the pact stands at 26.83 MBPD, its highest level since April 2020. Iran, not party to the OPEC+ agreement but a member of OPEC, exported 2.52 MBPD of Crude in July, its highest level of output since April of 2019.
Israeli jets struck at Iranian-backed rebel launch sites in Lebanon, raising geopolitical risk concerns. Iran stands accused of attacking a second commercial vessel this week, the Asphalt Princess, off of the Gulf of Oman. The recently elected Iranian president has all but conceded that talks regarding the JCPOA in Vienna have failed.
US Crude inventories gained for a second week in 11, increasing by 3.627 MB. Crude stocks remain 6% below their five-year average and are 79.4 MB below levels of last year at this time. The price of WTI fell $6.07 on the week. Inventories in the three PADDs affected by trans-Atlantic trade gained by 2.381 MB. The increases were most significant in PADD 3, the US Gulf Coast, where inventories rose by 3.101 MB. Though Crude imports to the US fell by 75 KBPD, exports fell dramatically, falling by 585 KBPD to 12- week lows of 1.904 MBPD as the spread between Brent and WTI continues to narrow. Inventories at the Nymex delivery point of Cushing OK fell for an eighth consecutive week, dropping by 543 KB to a level of 34.9 MB. It should be mentioned that Cushing inventories are now more than 50% below maximum operating storage levels. Cushing inventories remain at their lowest level since January of 2020. Both domestic production and refinery utilization remain unchanged on the week. Shipping data does indicate continued limited flow of Crude exports. We see no appreciable change in import flows, export flows, production or refinery utilization in the coming week. As a consequence, we expect US Crude inventories to increase by 2.0 to 2.5 MB in the week ahead.
US Gasoline inventories fell for a fifth week in 10, dropping by 5.291 MB. US Gasoline inventories are now 3.2% below their five-year average and are 18.9 MB below levels of last year at this time. The price of RBOB fell 1084 points on the week. This was the sharpest weekly price loss in Gasoline since the week of March 19th. Inventories in the three PADDs affected by trans-Atlantic trade fell by 4.542 MB. The drop was again most pronounced in PADD 1, the US Atlantic, were stocks fell by 3.507 MB. Inventories in the PADD 1 subsection that encompasses New York Harbor, the Nymex delivery point, fell sharply again, dropping by 2.445 MB. This reduction was facilitated by a further drop in imports of 64 KBPD to a level of 845 KBPD. Shipping data indicates a sharp reduction in both freight rates and the flow of Gasoline to the US Atlantic Coast in the week ahead which should continue to aid in the reduction of inventories in the northeast. Demand stands at 9.775 MBPD, an increase of 450 KBPD in the last week. As this is now August, demand may remain static in the week ahead at these high levels despite the average price at the pump in the US for Gasoline being $3.19 per gallon. With probable static demand and production slightly countered by reduced imports, we expect Gasoline inventories to fall by 5.5 to 6.0 MB in the coming week.
US Distillate inventories increased for a sixth week in 10, rising by 832 KB. Distillate inventories are now 6% below their five-year average and 41.3 MB below levels of last year at this time. The price of ULSD fell 1164 points on the week. This was the largest single weekly drop in ULSD prices since March. Inventories in the three PADDs affected by trans-Atlantic trade gained by 1.373 MB. The increase was most pronounced in PADD 1, the US Atlantic, where stocks increased by 2.096 MB. Inventories in PADD 3, the US Gulf Coast, remained near unchanged, falling by 31 KB. Exports from the US Gulf Coast were measured at 1.302 MBPD in the past week. We expect this figure to be reduced to roughly 1 MBPD as the flow of exports and freight rates have both fallen measurably in the last week. Demand stands at 3.618 MBPD, a profound drop of 738 KBPD in the last week. We believe this figure to be rather low, even for August, and anticipate an increase of 300 KBPD. This increase in demand, likely unchanged utilization rates, and the anticipated reduction in exports, should result in Distillate inventories remaining within 500 KB of unchanged in the week ahead.
OPEC, the Paris based IEA and the US government-based EIA will all release their monthly reports on Thursday. The compilation of data by these three organizations may not be nimble enough to detect reductions in demand linked to COVID-19 resurgence. Volatility is expected to continue in the week ahead. Outright price direction is quite difficult to project. It does appear that Gasoline should continue to have the strongest relative value in the petroleum complex and WTI the weakest relative value.