Market Summary: September 5, 2021

Hurricane Ida, a category four storm with winds exceeding 145 MPH, made landfall last Sunday in eastern Louisiana. Most US Gulf oil production, Natural Gas production and more than 2.3 MBPD of refining capacity were affected. Slow recovery of navigable waterways and even slower recovery of electricity continue to inhibit restoration of any significant measure in production or refining. Total US commercial petroleum inventories fell by 13.6 MB on the week. WTI gained 0.8%, Brent 1.3% and ULSD 2% while RBOB fell due to an adjustment from summer to winter spec by 5.5%. Despite the loss of regional demand from eastern Louisiana and ongoing concerns over the delta variant of COVID-19, overall US petroleum demand hit an all-time high of 22.8 MBPD.

Weaker than expected unemployment numbers released on Friday slowed increases in US equities. On the week, the Dow lost 0.2% while the S&P gained 0.6% and the NASDAQ 1.5%. The poor unemployment number may serve to delay the Federal Reserve's termination of the practice of introducing more than $120 billion a week into the economy. Should the Fed delay such a change in policy, the dollar would be expected to continue weakening for the near term. On the week, the dollar index lost 0.54 to settle at 92.12. Conversely, gold prices increased as would be expected, rising by $9.40 per ounce to settle at $1,829.90 per ounce.

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93.3% of US Gulf oil production is still shut in. 89.5% of Natural Gas production in the US Gulf is still shut in. Roughly 2.1 MBPD of refining capacity in eastern Louisiana representing approximately 12% of national refining capacity is still shut in. The Louisiana Offshore Oil Platform (LOOP), perhaps the most significant export facility for Crude oil, remains shut in. Though significant efforts by the US Coast Guard and other authorities to clear numerous waterways and rivers of debris have been productive, access to a number of commercial refining and production facilities remains closed. The loss of power appears to be the largest factor in the restart and recovery of energy assets. The primary power provider in eastern Louisiana has advised that the eight main transmission lines connecting them to other sources of power and the National Grid remain closed. Though the utility has not given a specific timeline, most people estimate a large area of eastern Louisiana will be without power for a significant portion of the coming week.

The Colonial Pipeline resumed operations after closure for roughly 50 hours in the aftermath of Hurricane Ida due to precautions and assessments for damage in the Louisiana area. The Colonial Pipeline carries roughly 2.35 MBPD of refined petroleum products from the US Gulf Coast throughout the US Atlantic Coast. Throughput into the Colonial Pipeline at its point of origin in Texas should remain consistent as all the refinery damage occurred in a region east of the Lake Charles LA refinery complex.

OPEC+ members convened a virtual meeting based in Vienna this past Wednesday and agreed to continue to maintain their course of gradually increasing monthly Crude output by 440 KBPD. A committee to the organization released data prior to the meeting indicating a small delay in a rise in demand of roughly four months from their original schedule due to anticipated demand suppression from a recent increase in COVID-19 cases stemming from the delta variant. The results of the meeting were largely expected and had virtually no impact on price direction.

US Crude inventories fell for a fourth consecutive week and 13th in 15, dropping by 7.169 MB. Crude stocks remain 6% below their five-year average and are 73 MB below levels of last year at this time. The price of WTI gained $0.55 on the week. Crude stocks remain near 19 month lows. Inventories in the three PADDs affected by trans-Atlantic trade fell by 8.266 MB. The reduction was disproportionately large in PADD 3 where stocks fell by 8.97 MB. Inventories did increase slightly in PADDs 1 and 2. The reduction in inventories was clearly linked to the preparation for the arrival of Hurricane Ida. Imports actually increased on the week by 183 KBPD to a level of 6.34 MBPD. Production also rose by 100 KBPD to 11.5 MBPD. The flow of exports increased significantly this week, rising to a level of 3.04 MBPD. Such an increase was to be expected well in advance of closures in preparation for the hurricane. Inventories at the Nymex delivery point of Cushing OK increased again for a second consecutive week and second week in 11, rising by 836 KB. Inventories at Cushing are still nearly 30% below their five-year average. Given significant closure of transportation routes, Crude production and refining capacity, we expect Crude inventories in the US to drop significantly in the week ahead, possibly by as much as 10 MB.

US Gasoline inventories rose for a second week in seven, increasing by 1.290 MB. Gasoline inventories are now 2% below their five-year average and are 7.7 MB below levels of last year at this time. The price of RBOB fell 1202 points on the week as the prompt month expiry of September futures marked the end of summer spec Gasoline on a wholesale level. National Gasoline inventories still remain near their lowest levels since November of 2020. Gasoline demand rose slightly this week to a level of 9.578 MBPD, some 792 KBPD higher than levels of last year at this time. Inventories in the three PADDs affected by trans-Atlantic trade gained by 244 KB on the week. Gains in PADD 1 of 1.281 MB, driven by still significant import flows that rose by 62 KBPD to a level of 1.138 MBPD, a figure which is expected to rise in the week ahead based on shipping data, was offset by a reduction in PADD 2, the midcontinent, of 1.095 MB. Inventories in the Gulf Coast were near unchanged, increasing by 58 KB. The combination of moving inventories to secondary storage in advance of the Labor Day weekend, traditionally marking the end of summer in the US and the profound loss of Gasoline production from 2.3 MBPD of refining capacity in eastern Louisiana should result in a dramatic and possibly historic reduction in US Gasoline inventories. We expect Gasoline stocks in the US to fall by as much as 12 MB in the week ahead. We further expect this trend to persist as long as power remains unrestored in large swaths of eastern Louisiana.

U.S. Distillate inventories fell for the second week in five, dropping by 1.732 MB. Distillate stocks are now 9% below their five-year average and 40.8 MB below levels of last year at this time. The price of ULSD gained 502 points on the week. Inventories in the three PADDs affected by trans-Atlantic trade fell by 1.68 MB. A small gain in PADD 2 of 516 KB was offset by a small reduction in PADD 1 of 238 KB and a significant reduction in PADD 3 of 1.961 MB. It goes without saying that the loss of refining capacity in eastern Louisiana will result in a significant reduction in Distillate inventories this week. There has been a virtual freeze on the flow of Distillate exports from the US Gulf Coast resulting in freight rates dropping to levels that may compel owners to ballast into other chartering zones. This restriction of export flows from the US Gulf Coast which until relatively recently were as much as 1.3 MBPD may result in a reduction of exports to as little as 300-400 KBPD. Accordingly, we expect US Distillate inventories to fall in the week ahead but by a much smaller amount than Gasoline. We would expect stocks to drop by 6 to 7 MB and would repeat what we stated in Gasoline that this trend may persist as long as power remains unrestored in eastern Louisiana.

The timing in the delay of the Federal Reserve from slowing down their effective printing of money should result in significant dollar weakness in the near term. This, coupled with significant reductions in petroleum inventories across the board and an uncertain recovery period from the hurricane for refining activities should result in prices firming considerably in the week ahead. We further expect cracks and refined product values to improve significantly in the near term.

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