Market Summary: September 12, 2021

In the week following the worst hurricane in the US Gulf Coast in the last 16 years, Crude and product market prices are conspicuously void of trends. The bullish effect of the loss of approximately 21 MB of Crude production due to Hurricane Ida has been countered with a significant release from China's Strategic Petroleum Reserve in an attempt to stem the rapidly rising tide of inflation. The recent sale from the US Strategic Petroleum Reserve last month as well as an aggressive price reduction in the OSP from the Saudis to a number of Asian customers further weighed on markets. On the week, WTI gained 0.6% and Brent 0.4% while ULSD lost 0.6% and RBOB was flat. Total US commercial petroleum inventories fell much less than expected, only dropping by 1.5 MB.

A burst in inflation in the United States which reached an annualized rate of 8.3% this week was outdone by China where the annualized rate of inflation was measured at 9.0%. These concerns weighed heavily on equity indexes. On the week, the Dow fell 2.2%, the S&P 1.7% and the NASDAQ 1.6%. The dollar index recovered every bit of last week's losses, gaining by 0.54 to settle at 92.64. Gold fell by 2.3% on the week, registering its first weekly loss in the last five to settle at $1,792.10 per ounce.

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In order to ease overwhelming inflationary pressures, China has ordered a significant release of Crude inventories from their Strategic Petroleum Reserve. This release will also serve to address sharp increases in Chinese demand which, on a quarterly basis, are 13% higher than the third quarter in the pre pandemic year of 2019. This order, coupled with the release of supplies from the US Strategic Petroleum Reserve last month as well as the implied market weakness derived from a significant reduction in OSP from the Saudis to Asian customers served to put a lid on price gains despite ongoing outages in US Crude production. At the time of this writing, 66% of Gulf Coast Crude output remains offline.

Ongoing power outages in eastern Louisiana continue to prevent approximately 1.5 MBPD of refining production from resuming operation. Though most waterways have been cleared in the aftermath of the storm, damage to the electrical grid and a few specific refineries is quite significant. It would appear that as much as 600 KBPD of refining capacity in the region was damaged to the point where it will require long term maintenance. One refinery in Belle Chasse LA with a 278 KBPD capacity may remain permanently closed due to extensive damage.

The US government-based EIA lowered its 2021 Crude demand expectations due to the ongoing proliferation of the delta variant of the COVID-19 virus. The EIA sees global demand increasing in 2021 by 5%, a 0.3% reduction in demand growth from their report a month ago.

OPEC will release its monthly report on Monday. It is expected to largely echo the findings of the EIA.

US Crude inventories fell for a fifth consecutive week and 14th in 16, dropping by 1.528 MB. Crude stocks remain 6% below their five-year average and are 76.5 MB below levels of last year at this time. The price of WTI gained $0.43 on the week. Crude stocks continue near 19-month lows. Inventories in the three PADDs affected by trans-Atlantic trade fell by 535 KB. The reduction was most significant in PADD 3, the US Gulf coast, where stocks fell by 2.593 MB. This reduction was due almost entirely to the drop in production in the United States which fell by 1.5 MBPD to a level of 10.0 MBPD. Inventories at Cushing OK, the Nymex delivery point, increased in large part due to circumstances linked to the hurricane, rising by 1.918 MB. This was the third week in 12 that stocks increased at Cushing. As expected, the flow of exports decreased dramatically, dropping by more than 700 KBPD to a level of 2.342 MBPD. We do expect an increase in export flows in the week ahead as the Louisiana Offshore Oil Platform has come back online. It remains to be seen if they will have any significant volume to load given the severity of the drop in production. Refinery utilization fell by 9% to 81.9% of refining capacity. Virtually every bit of the loss occurred in the Gulf Coast, specifically Louisiana. In the week ahead, we expect utilization rates to increase very slightly, exports to remain somewhat stable and imports to remain low. It is not likely that production will increase. As a consequence, we anticipate US Crude inventories will drop in the week ahead by 1.5 to 2.0 MB.

US Gasoline inventories fell for the sixth week in eight, dropping by 7.215 MB. Gasoline inventories are now 4% below their five-year average and are 11.9 MB below levels of last year at this time. The price of RBOB remained unchanged on the week. National Gasoline inventories remain at their lowest levels in five years, last reaching this level in November of 2017. This was the largest weekly drop in Gasoline inventories since late February. Gasoline demand rose slightly, increasing by 30 KBPD. Inventories in the three PADDs affected by trans-Atlantic trade fell by 7.749 MB. The reduction was most pronounced in PADD 1, the US Atlantic, where stocks fell by 3.582 MB. Improving economic conditions, students returning to school and draws to secondary storage in advance of the Labor Day weekend helped propel inventories lower. We find it incongruous that a 9% reduction in refinery utilization to a level of 81.9% can occur with a simultaneous report of an increase in Gasoline production of 237 KBPD. We expect a rather significant correction from the EIA on this obvious error in the week ahead. The flow of imports dropped significantly, falling by 239 KBPD to a level of 899 KBPD. Trans-Atlantic freight for Gasoline has not increased nearly as much as one would anticipate given the presumed loss of Gasoline production in the US Gulf. Shipping data does indicate a very slight decrease in imports of Gasoline in the week ahead. Stabilized production, flat imports and a slight drop in demand should result in a reduction of US Gasoline inventories by 3.5 to 4.0 MB in the coming week.

US Distillate inventories fell for a third week in six, dropping by 3.141 MB. Distillate stocks are now 12% below their five-year average and are 42.2 MB below levels of last year at this time. The price of ULSD fell by 134 points on the week. Inventories in the three PADDs affected by trans-Atlantic trade fell by 3.352 MB. The reduction was most conspicuous in PADD 3, the US Gulf Coast, where stocks fell by 2.419 MB. This reduction is solely attributable to the after-effects of Hurricane Ida. A small reduction in PADD 2 was noted of 862 KB. We expect this figure to continue to draw in the weeks ahead as agricultural demand emerges. Distillate exports from the US Gulf Coast last week were 1.09 MBPD. Shipping data indicates a significant reduction in export flows in the week ahead, possibly to levels as low as 600 KBPD. Freight rates from the US Gulf Coast to Europe and elsewhere have plummeted to the point where vessel owners may choose to reposition vessels in other markets rather than fix at rates that are now lower than worldscale 60 for MR2 tonnage. We expect Distillate inventories to fall by 3.5 to 4.0 MB in the week ahead.

Outright market direction is difficult to determine as tightening supplies from the storm are being offset by both SPR releases from China and ongoing monthly increases from OPEC+. Signs of improving refined product demand are being countered by the impact of the persistent delta variant of the COVID-19 virus. The cumulative effect of these conflicting forces will likely result in rangebound trading. We expect at some point in the near future that cracks for both Gasoline and particularly Distillate will start to trend in a positive manner.

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