Market Summary: September 26, 2021

Petroleum prices rose for a fifth consecutive week as worse than expected long-term damage to both refining and production assets in the US Gulf coupled with the inability of OPEC+ to increase production overshadowed any concerns related to demand destruction associated with still widespread cases of Covid-19. US Crude inventories fell to their lowest level in three years and Brent prices reached their highest levels since October 2018 as US refinery utilization did in fact increase to pre-hurricane levels. On the week, WTI gained 3%, Brent 3.7%, RBOB 0.8% and ULSD 2.6%. Total commercial petroleum inventories in the US fell by 2.6 MB on the week.

US equity indexes increased on the week but were bridled by concerns regarding an increasingly likely debt impasse in Washington as well as growing concerns regarding rampant inflation. On the week, the Dow gained 0.6%, the S&P 0.5% and the NASDAQ 0.1%. This was the Dow’s first gain in the last four weeks. The dollar index remained near unchanged on the week, settling at 93.28. Gold prices eased slightly as well, dropping by $3.30 to settle at $1,750.60 per ounce.

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A number of US refineries in the Gulf of Mexico, now short of domestic Crude due to Hurricane Ida, are buying Crude in increasing quantities from both Iraq and Canada. Shell confirmed a significant percentage of Crude produced in the Gulf would remain off-line until early 2022. This has enabled the value of WTI to diminish significantly versus the value of Brent. Despite this, WTI inventories at Cushing Oklahoma are down more than 42% on the year and 26% below their five-year average. Storage utilization at Cushing stands at 43% of capacity.

The next OPEC+ meeting is scheduled to convene virtually in Vienna on the 4 th of October. Both Nigeria and Angola are having production issues which is inhibiting the participants to the OPEC+ accord to continue with their 400 KBPD increase each month.

The Chinese government offered 7.3 MB of Crude from its Strategic Petroleum Reserve in an attempt to control and influence rampant inflation. Only 4.4 MB of the 7.3 MB was sold, part of which went to a state-run refining group and another parcel to a private refining group. The sale had virtually no impact whatsoever in reducing or even stabilizing recent price gains. Fear of default by a large Chinese real estate developer which actually served to bolster the value of the US dollar was the dominant narrative from China this week.

US Crude inventories fell for a seventh consecutive week and 16th in the last 19, dropping by 3.147 MB. Crude stocks are now 8% below their five-year average and are 80.4 MB below levels of last year at this time. The price of WTI gained $2.01 on the week. Inventories in the three PADDs affected by trans-Atlantic trade dropped by 3.147 MB. The reduction was most significant in PADD 2, the midcontinent, where stocks fell by 2.734 MB. Inventories at Cushing Oklahoma which is encompassed by PADD 2 fell by 1.476 MB. As stated earlier, Cushing inventories have fallen by 42% so far this year and are 26% below their five-year average. Inventories at Cushing are expected to fall further in the week ahead. The rather significant return of refinery utilization by 5% to a level of 87.5% was significant and despite the fact that imports increased we believe this increase in utilization when coupled with long-term damage to production facilities in the Gulf of Mexico will result in continued reductions in US Crude inventories. In the coming week, with refinery utilization and production likely unchanged, and even with a slight increase in imports, Crude inventories should fall by 2.0 to 2.5 MB.

US Gasoline inventories increased for the third week in 10, rising by 3.474 MB. Gasoline inventories are now 3% below their five-year average and are 5.9 MB below levels of last year at this time. The price of RBOB gained 72 points on the week. Gasoline inventories in the PADD 1 US Atlantic recovered from near four-year lows to increase by 110 KB. Inventories in the PADD 1 subsection that encompasses New York Harbor, the Nymex delivery point, increased sharply, rising by 1.759 MB. This was largely augmented by a sharp and surprising increase in imports of 444 KBPD to a level of 1.082 MBPD. This was the first increase in imports in three weeks. Gasoline demand remained essentially unchanged on the week. Shipping data indicates a reduction in imports in the week ahead. Further expectations of reduced demand as autumn settles in across the United States as well as anticipated flat production numbers should result in Gasoline stocks rising nationally by 1.0 to 1.5 MB in the coming week.

US Distillate inventories fell for a fourth week in a row and fifth in eight, dropping by 2.554 MB. Distillate stocks are now 14% below their five-year average and are 46.6 MB below levels of last year at this time. The price of ULSD gained 580 points on the week. Inventories in the three PADDs affected by trans-Atlantic trade fell by 2.379 MB. The reduction was most pronounced in PADD 1, the US Atlantic coast, where stocks fell by 2.852 MB as agricultural demand and preparation for thermal demand converged. National Distillate demand stands at 4.424 MBPD, a figure that is above its five-year high. Production increased for the first week in four, rising by 298 KBPD to a level of 4.454 MBPD. Freight rates in the US Gulf remain terribly depressed but may have turned a corner due to vessels being positioned in other markets as the arb to Europe remains poor for Distillate and somewhat open for naphtha. With exports and production likely flat in the week ahead with a further increase in demand, we expect Distillate inventories to fall slightly. In the coming week, we expect Distillate inventories will fall by 0.5 to 1.0 MB.

Technical and fundamental data points to a continued increase in the value of Brent versus WTI. Seasonal considerations should result in continued weakness in the relative value of Gasoline versus Crude. Diminishing value in Gasoline/Brent cracks is likely to continue. Similar to last week, we expect outright prices to rise in choppy conditions.

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