Market Summary: October 17, 2021

Petroleum prices rose for an eighth consecutive week. This is the longest streak of weekly gains for Brent in more than 20 years. Continued OPEC+ discipline spearheaded by Saudi dismissiveness of additional production requests, the approach of winter in the northern hemisphere, a sharp rise in petroleum demand linked to price increases in Natural Gas, LNG and coal and a constructive monthly report from the IEA seeing overall petroleum demand exceeding global production through the fourth quarter were the key drivers for price increases. This was also the likely peak of refinery turnaround season as a drop in utilization of 3% resulted in the largest increase in weekly Crude inventories since March. Total commercial petroleum inventories in the US gained 4.9 MB. On the week, WTI prices gained 3.7%, Brent 3.0%, RBOB 5.1% and ULSD 4%.

US equity indexes improved, registering their most productive week since July, driven by strong bank earnings reports as well as positive retail sales figures. On the week, the Dow gained 1.6%, the S&P 1.8% and the NASDAQ 2.2%. The dollar index softened slightly, dropping by 0.15. Gold prices conversely increased as expected, gaining $10.60 on the week to settle at $1,767.80 per ounce.

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The Paris-based IEA issued its monthly report this week stating that “an acute shortage of Natural Gas, LNG, and coal has sparked a run-up in prices for energy supplies and is triggering a massive switch to oil in the process.” The report went on to state that it could add more than 500 KBPD of petroleum demand in the near term. The IEA raised its demand growth estimate for the current year by 300 KBPD to a level of 5.5 MBPD. It also increased global demand estimates for 2023 slightly to a level of 3.3 MBPD. The report acknowledged the fierce competition between Chinese and European interests in securing LNG supplies.

OPEC released its monthly report largely echoing the views of the IEA. The cartel expects demand growth to increase by 196 KBPD for the balance of 2021 and maintains its estimate for demand growth next year at 4.2 MBPD. The report went on to state that it estimates petroleum stocks in the OECD as having fallen by approximately 670 KBPD in the month of August. This is a trend that the cartel expects will continue through the end of 2022 which is concurrent with their projected end of monthly increases of 400 KBPD associated with the current OPEC+ agreement.

The US operating rig count is now 136 rigs higher than levels of last year at this time, has risen six weeks in a row and will likely exceed pre-pandemic levels by the end of October.

US Crude inventories increased for a third consecutive week and sixth in 22, rising by 6.088 MB. Crude stocks are now 6% below their five-year average and 62.1 MB below levels of last year at this time. The price of WTI gained $2.93 on the week. Inventories in the three PADDs affected by trans-Atlantic trade increased by 6.547 MB. Inventories rose by a disproportionately large amount in PADD 3, the US Gulf coast, due to a 3% reduction in refinery utilization and an increase in production for a fifth consecutive week with a rise of 100 KBPD to a level of 11.4 MBPD. As previously stated, this was the largest gain in weekly Crude inventories since March. This occurred despite exports increasing for a fourth week in five. Exports increased 400 KBPD to a level of 2.5 MBPD despite the WTI/Brent spread improving. Imports fell sharply, dropping by 1.041 MBPD to a level of 5.994 MBPD, the first drop in imports in the last four weeks. Inventories at the Nymex delivery point of Cushing Oklahoma fell by 1.968 MB, the first week in three that stocks have fallen there. It was the largest drop in Cushing inventories since February. Increasing export flows were contributory to Cushing’s reduction. In the week ahead, it is likely that production will continue to increase, that utilization will drop a bit further and that both exports and imports should remain proximate to current levels. We therefore anticipate Crude inventories will gain by 2.5 to 3.0 MB in the week ahead.

US Gasoline inventories fell for the first week in four, dropping by 1.958 MB. Gasoline inventories are now 2% below their five-year average and are 2 MB below levels of last year at this time. The price of Gasoline gained 1202 points on the week. Gasoline stocks in the three PADDs affected by trans-Atlantic trade fell by 1.211 MB. The reduction was most significant in PADD 2, the US midcontinent, where stocks fell by 1.05 MB. The reduction in refinery utilizations cited earlier was the key force in reducing stocks as demand actually fell by 241 KBPD. Inventories in the PADD 1 subsection that encompasses New York Harbor, the Nymex delivery point, gained by 1.115 MB on the week. This occurred despite a significant drop in Gasoline imports of 545 KBPD to a level of 543 KBPD. This is the largest single drop in inventories since last October and has reduced imports to near their five-year average. Shipping data continues to indicate a rather sparse flow of Gasoline from northwest Europe to the US Atlantic coast. This is further evinced by tight Gasoline inventories in Europe which are close to fiveyear lows in the ARA region. Gasoline demand fell as we expected, dropping by 241 KBPD to a level of 9.186 MBPD. With a probable limited change in production and with imports and demand also expected to be near unchanged, Gasoline inventories are likely to fall slightly in the coming week, dropping by 1.0 to 1.5 MB.

US Distillate inventories fell for a sixth week in seven, dropping by 24 KB. Distillate inventories are now 9% below their five-year average and are 35.3 MB below levels of last year at this time. US Distillate stocks remain very close to their five-year low for this time of year. The price of ULSD gained 1000 points on the week. Inventories in the three PADDs affected by trans-Atlantic trade fell by 528 KB. The drop was most pronounced in PADD 1, the US Atlantic, where stocks fell by 1.482 MB. This largely reflects anticipated stocking for thermal needs. Inventories grew in PADDs 2 and 3. The growth in PADD 3 of 741 KB was rather odd as utilization rates fell but exports increased, rising by 200 KBPD to a level of 1.0 MBPD. This occurred despite continually depressed freight rates for flows of Distillate as well as Naphtha from the US Gulf to Latin America and Europe. Static production at best, possible further increase in demand and a consistent export flow should lead to a further reduction in Distillate inventories in the week ahead of 1.0 to 1.5 MB.

Continued demand increases in petroleum from other energy sources cited earlier, OPEC discipline, the advance of winter in the northern hemisphere and likely prospects for a weaker dollar all appear to portend higher prices. On a purely technical basis, all contracts in the petroleum complex are severely overbought and therefore we expect prices to remain firm in what may be extremely volatile conditions.

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