Market Summary: November 14, 2021

Energy prices fell for a third consecutive week and third week in 12 as the looming threat of intervention by executive order from the US president to try to reduce energy prices dominated market influences this week. The rate of inflation was reported at 32-year highs, enabling the dollar to strengthen as sharp increases in the cost of the dollar are now inevitable. Both the US government-based EIA and OPEC issued monthly reports that were interpreted as bearish. On the week, WTI fell 0.6%, Brent 0.7%, RBOB 0.4% and ULSD 2.1% as US commercial inventories continued to drop.

Core US inflation rose to a level of 6.2% on a year-on-year basis in October, the highest rate in 32 years. The rate of inflation far outpaced wage growth in the US as US consumer sentiment reached 10-year lows. On the week, the Dow fell 0.6%, the S&P 0.3% and the NASDAQ 0.7%. The dollar index reached 16-month highs, settling at 95.12, an increase of nearly one full point. Gold prices gained another $47.70 per ounce to settle at $1,867.70. Both the dollar index and gold prices rose dramatically due to the certainty of the increase in the cost of the dollar due to inflationary pressures.

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Three options to halt the increase in energy prices have reportedly been discussed by the US President and his staff of economic advisors. They are considering waiting the market out (effectively doing nothing), tapping the 600 MB Strategic Petroleum Reserve, or halting US Crude exports. A fourth option, relaxation of biofuel mandates that would likely present immediate price relief on a retail level, is apparently being considered, though the impact such a move would have on the agricultural sector would be profound, rendering this option as unlikely.

The US government-based EIA released its monthly report on Thursday. The key element of the report showed a projection of a growing surplus in global Crude supplies in 2022. The report also projected a 770 KBPD increase in domestic production in 2022.

In its monthly report released on Thursday, OPEC reduced its global oil demand forecast for the fourth quarter of 2021 by 330 KBPD from last month’s report. Their projection for overall demand growth in 2021 was reduced by 160 KBPD to a level of 5.65 MBPD. As a consequence of this reduction downward, OPEC now projects global Crude consumption will surpass 100 MBPD in the third quarter of 2022, some three months later than their forecast of last month. OPEC continued to maintain its projection that global demand would rise by 4.15 MBPD in 2022. OPEC projected US Crude output increases at 610 KBPD for 2022, a figure 160 KBPD lower than the US government-based EIA.

US Crude inventories rose for a third consecutive week and ninth in the last 25, increasing by 1.002 MB. Crude stocks are now 7% below their five-year average and are 53.6 MB below levels of last year at this time. US Crude stocks are at their highest levels since August. The price of WTI fell by $1.49 on the week. Inventories in the three PADDs affected by trans-Atlantic trade fell by 891 KB. The reduction was disproportionately large in PADD 3, the US Gulf Coast, where stocks fell by 1.898 MB, offsetting gains in PADDs 1 and 2. The reduction was due in part to an increase in utilization rates in the region as well as a slight reduction in imports that are still more than 14.3% above last year at this time when the country was in the throes of the Covid pandemic. Production remained at 11.5 MBPD, still the highest level in 2021. Inventories at the Nymex delivery point of Cushing Oklahoma continued to fall though by a much smaller amount this week, dropping by only 34 KB. Though refinery utilization was reported as unchanged at 86.7% of capacity, Crude runs in the country did increase by 343 KBPD. In the week ahead, we see production, refinery utilization and imports all near unchanged. Shipping data indicates Crude exports, currently at 3.053 MBPD, may increase by 100 to 200 KBPD. We therefore expect national Crude inventories to remain within 500 KB of unchanged in the coming week.

US Gasoline inventories fell for a fifth consecutive week and fifth in eight, dropping by 1.555 MB. Gasoline inventories are now 4% below their five-year average and are 12.7 MB below levels of last year at this time. US Gasoline inventories remain at their lowest levels since November 2017. The price of Gasoline fell by 95 points on the week. The average national price at the pump remains at its highest level since 2014. Gasoline stocks in the three PADDs affected by trans-Atlantic trade fell by 1.09 MB. Similar to Crude, the drop was most significant in PADD 3, the US Gulf Coast, where stocks fell by 1.815 MB. This reduction occurred as a drop in overall national production of 122 KBPD and imports of 80 KBPD were also reported. Inventories in the PADD 1 subsection that encompasses New York Harbor, the Nymex delivery point, gained by 565 KB despite the reduction in imports cited earlier. Trans-Atlantic freight rates have risen over the last week, likely limiting any increases in import flows. Despite the significant impact inflation and high prices are having on demand, a significant shift in inventories to secondary storage in advance of the Thanksgiving holiday in the US should be the key feature of statistics released next week which we expect will show an overall reduction in Gasoline inventories of 2.5 to 3.0 MB.

US Distillate inventories fell for a fifth week in six, dropping by 2.613 MB. US Distillate inventories are now 6% below their five-year average and are 24.8 MB below levels of last year at this time. The price of ULSD fell by 519 points on the week. Overall US Distillate inventories are at their lowest level since April 2020. Inventories in the three PADDs affected by trans-Atlantic trade fell by 1.293 MB. The reduction was most significant in PADD 1, the US Atlantic, where stocks fell by 1.068 MB. The reduction in inventories in PADD 1 was largely attributed to increasing thermal needs as colder weather continues to envelop the Northeast. Though inventories in PADD 3, the US Gulf Coast, increased by only 32 KB, the flow of exports grew significantly to 1.239 MBPD. Shipping data continues to show strong demand for tonnage, particularly for the southern part of South America. This feature will likely stretch the supply line of ships and cause the market to remain firm for some time. Overall US demand did increase as we expected, rising by 594 KBPD to a level of 4.28 MBPD. The likelihood of flat production, increases in demand due to thermal needs and the ongoing flow of exports should result in Distillate inventories falling by 3.0 to 3.5 MB in the week ahead.

We expect prices to remain near unchanged until clarity is reached on the decision, if any, made by the US president to reduce energy prices in an effort to tame inflation. Current technical analysis has rendered the sale of cracks in nearby months as profitable due to the recent reversal in outright prices. We have no view on outright price direction, but expect near term structure in refined products and cracks to remain soft.

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