Petroleum prices rose for a seventh consecutive week as WTI hit $80 for the first time since November 1, 2014. No imminent release from the US Strategic Petroleum Reserve as falsely rumored earlier in the week, more switching to petroleum for power generation as Natural Gas prices continue to increase at record rates particularly in Europe, OPEC+ maintaining restraint in sticking to its current output, the ongoing easing of Covid-19 restrictions thus facilitating demand and US Crude production still below Hurricane Ida levels all contributed to price increases this week. WTI gained 4.6%, Brent 4.9%, RBOB 5.2% and ULSD 3.8%. Total commercial petroleum inventories fell by 0.8 MB on the week.
A slowing rise in employment numbers and the growing likelihood of rate increases by the Federal Reserve limited equity index gains. On the week, the Dow gained 1.2%, the S&P 0.8% and the NASDAQ 0.1%. The dollar index remained near unchanged, gaining 0.03 to settle at 94.10. Gold prices also changed very little on the week, dropping by $3.10 to settle at $1,757.20 per ounce.
The US energy secretary walked back comments from earlier in the week that it was considering a release of Crude from the Strategic Petroleum Reserve as well as a threat to ban Crude exports from the US. The secretary had stated that these were two items that could be used as tools to influence prices lower at the beginning of the week.
Compliance to the OPEC+ agreement stood at 109% at the end of September or 430 KBPD below output targets. In effect, the OPEC+ production increases are slightly more than a month behind schedule. Despite requests from a number of world leaders, the parties to the agreement were not inclined to increase output as revenue has increased substantially with the current output strategy. A number of analysts surmise that the implied threat of demand destruction linked to Crude prices exceeding $80 per barrel is diminishing as inflation continues to run at 30-year highs.
Natural Gas prices increased for an eighth consecutive week with volatility at or near record highs, particularly in the European market. Weekly prices did ease after touching 13-year highs on Thursday. Prices remain firm despite the president of Russia’s statement that sales to Europe would increase. European Natural Gas stocks are well below their lowest levels in 10 years. Some analysts estimate as much as 750 KBPD of new petroleum demand linked to Natural Gas shortfalls will occur in Europe alone. The shortfall of Natural Gas has also led to a power crunch in China. The Chinese central authorities issued orders this week to substantially increase coal production at mines recently idled.
US Crude inventories increased for a second week in nine and fifth in 21, rising by 2.345 MB. Crude stocks remain 7% below their five-year average and are 72.0 MB below levels of last year at this time. The price of WTI gained $3.47 on the week. Inventories in the three PADDs affected by transAtlantic trade increased by 1.404 MB. Inventories rose by a disproportionately large amount in PADD 2, the US midcontinent, where stocks grew by 2.317 MB. Inventories at the Nymex delivery point of Cushing Oklahoma which is encompassed by PADD 2 increased for the second week in a row, rising by 1.548 MB. Growth in Cushing inventories helped explain a sharp reduction in US Crude exports. which fell by 906 KBPD to a level of 2.1 MBPD. Shipping data indicates a continued slower flow of exports. Production increased by 200 KBPD to 11.3 MBPD, still slightly below pre-Hurricane Ida levels. In the week ahead, it is likely that refinery utilization and production will remain near unchanged while imports are expected to fall and exports remain relatively stagnant. As a consequence, we expect an increase of 1.5 to 2.0 MB in Crude stocks in the coming week.
US Gasoline inventories increased for a third week in a row and fifth week in 12, rising by 3.256 MB. Gasoline inventories are now 1% below their five-year average and are 1.6 MB below levels of last year at this time. The price of Gasoline gained 1162 points on the week. Gasoline stocks in the three PADDs affected by trans-Atlantic trade rose by 2.733 MB. A disproportionately large amount of the increase occurred in PADD 1, the US Atlantic, where stocks rose by 2.353 MB. Stronger refinery utilization rates as well as a 99 KBPD rise in the flow of imports of Gasoline which largely target the Atlantic coast were among the reasons for the sharp increase. Inventories in the PADD 1 subsection that encompasses New York Harbor also gained, climbing by 1.353 MB. Gasoline demand increased by 28 KBPD to a level of 9.427 MBPD, a level which strikes us as unusually high given seasonal norms. Shipping data indicates a reduction, possibly significant, in the flow of Gasoline imports as freight rates from Europe for such voyages have fallen. With no change in production and imports flat at best, this week’s demand number appears somewhat high given seasonal considerations. As a consequence, the reduction in demand will likely result in Gasoline inventories rising by 2.0 to 2.5 MB in the week ahead.
US Distillate inventories fell for a fifth week in six, dropping by 396 KB. Distillate inventories are now 11% below their five-year average and are 42.5 MB below levels of last year at this time. US Distillate stocks remain below their five-year low for this time of year. The price of ULSD gained 1072 points on the week. Inventories in the three PADDs affected by trans-Atlantic trade gained by 321 MB as a reduction of 618 KB in the geographically isolated PADD 5, Pacific region, altered national figures. The gain of 342 KB in PADD 3, the US Gulf Coast, was a result of exceptionally low export flows from the US Gulf to both Europe and South America. Exports fell by 152 KBPD to a level of 0.8 MBPD. We expect such flows to remain limited and further anticipate freight rates from the Gulf Coast will continue to fall. With production likely unchanged and exports lower, we expect demand, which is stated at 4.365 MBPD, to drop slightly. As a consequence, we expect Distillate inventories to remain within 500 KB of unchanged in the coming week.
A disciplined result of the OPEC meeting, severe Natural Gas shortages and the approach of winter in the northern hemisphere should all lead to increased petroleum prices in the upcoming week.