Market Summary: October 24, 2021

Petroleum prices rose for a record ninth consecutive week, reaching their highest levels since 2014. Ongoing OPEC discipline, continued shortfalls of US Crude production, diminished supplies at Cushing, easing of restrictions on Covid-19 vaccinated travelers, the pending arrival of winter in the northern hemisphere and an expanding switch to oil-based power from Natural Gas and Coal were the key drivers in providing price support. Total commercial petroleum inventories in the US fell by 9.8 MB last week as US Gasoline stocks fell to two year lows and Crude stocks in Cushing Oklahoma fell to three year lows. On the week, WTI gained 2.6% and Brent 0.9% while RBOB lost 0.2% and ULSD fell 1.4%.

Despite a sharp jump in US Treasury yields and rampant inflation throughout the economy, equity indexes gained on the week. The Dow rose by 1.1%, the S&P 1.6% and the NASDAQ 1.3%. The dollar index softened considerably, settling at 93.61 while gold prices rose sharply, increasing by $25.30 a settle at $1,793.10 per ounce.

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The Saudi energy minister dismissed appeals for production increases from a growing list of world leaders, stating that the OPEC+ agreement is not the cause of recent price increases. He cited external forces from other forms of energy as bearing the responsibility for the state of current prices. His sentiments were echoed by Russian leadership soon thereafter. Compliance among parties to the OPEC+ agreement for the month of September was calculated at 115%. Participants to the agreement will convene a virtual meeting based in Vienna on November 4th .

Crude inventories at the Nymex delivery point of Cushing Oklahoma are on a trajectory that will lead them near minimum operating levels, a largely notional figure of approximately 20 MB, in the next few weeks if present consumption trends continue. This has been reflected in considerable increases in both outright prices and the front-end structure of WTI. Though a major Shell production platform in the Gulf of Mexico damaged in Hurricane Ida is scheduled to return in the week ahead, overall US Crude production has failed to surpass levels prior to Ida’s arrival. Cushing inventories have fallen by slightly more than 4 MB in the last two weeks, are a full 40% lower since January 1, 2021 and are at their lowest levels since October 2018.

The recent easing of travel restrictions is expected to finally stimulate the call for jet fuel which has been the lone laggard in refined product demand recovery. Demand for all other product streams has recovered from pandemic lows.

US Crude inventories fell for the first week in four and 17th in the last 23, dropping by 431 KB. Crude stocks remain 6% below their five-year average and are 61.6 MB below levels of last year at this time. The price of WTI gained $1.48 on the week. Inventories in the three PADDs affected by transAtlantic trade fell by 331 KB. Inventories fell by a disproportionately large amount in PADD 2, the US midcontinent which encompasses the Nymex delivery point of Cushing Oklahoma, falling by 2.215 MB. As stated earlier, Cushing inventories stand at five year lows and have fallen by more than 40% in 2021. A significant portion of the reduction in Cushing inventories was due in large part to a 546 KBPD increase in Crude exports to a level of 3.1 MBPD. Shipping data indicates a flow of exports consistent with current levels. US Crude production fell for the first week in six, dropping by 100 KBPD to a level of 11.3 MBPD. With expectations of flat exports and a slight increase in both utilization rates and production, overall Crude inventories in the week ahead should be within 500 KB of unchanged. Should inventories in Cushing fall by more than 1.2 MB resulting in stock levels falling below 30 MB, the ongoing upward pressure on prices and structure of WTI would be quite significant.

US Gasoline inventories fell for a second week in a row and second week in five, dropping by 5.368 MB. Gasoline inventories are now 3% below their five-year average and are 9.3 MB below levels of last year at this time. The price of Gasoline fell by 43 points on the week. Gasoline stocks in the three PADDs affected by trans-Atlantic trade fell by 4.764 MB. The drop was most pronounced in PADD 1, the US Atlantic, where stocks fell by 2.718 MB. Inventories in the PADD 1 subsection that encompasses New York Harbor, the Nymex delivery point, fell by 2.746 MB. We are a bit surprised at this figure as the flow of Gasoline imports which frequently are destined for the greater New York area increased by 63 KBPD to a level of 606 KBPD. The overall national demand figure of 9.634 MBPD strikes us as being exceptionally high for this time of year. We expect this figure to ease next week, possibly substantially. This, coupled with a likely increase in imports as trans-Atlantic freight rates have improved significantly over the last week, should lead to a reversal in recent inventory trends. We therefore expect Gasoline inventories will draw by a much smaller amount than this past week. We anticipate a drop of 1.5 to 2.0 MB in the coming week.

US Distillate inventories fell for a third consecutive week and seventh week in eight, dropping by 3.913 MB. US Distillate inventories are now 10% below their five-year average and are 35.3 MB below levels of last year at this time. National Distillate stocks remain very close to their five-year low for this time of year. The price of ULSD fell by 348 points on the week. Inventories in the three PADDs affected by trans-Atlantic trade fell by 2.391 MB. The drop was most pronounced in PADD 3, the US Gulf Coast, where stocks fell by 3.253 MB. This was largely reflected in freight rates for MR2 tonnage from the Gulf Coast which rose measurably through the week. Shipping data indicates a flow of exports next week that may exceed 1.6 MBPD. The overall national demand figure of 4.278 MBPD strikes us as a bit high for this time of year. National weather forecasts indicate very limited thermal needs in the near term. We expect Distillate production to remain near unchanged in the week ahead. We also expect demand figures to remain flat at best. With a likely increase in exports, we anticipate overall Distillate inventories will draw by 3.0 to 3.5 MB in the week ahead.

Though far from reversed, cracks on a purely technical basis may be “topping.” It remains to be seen if this is a high or just a plateau before further increases. The increase in Crude structure in both WTI and Brent is likely to continue as the significant reductions in inventories of Crude in the last two weeks has occurred simultaneously with a significant reduction in refinery utilization. We continue to feel prices will increase in volatile conditions.

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