Market Summary: November 28, 2021

The discovery of a new Covid strain slammed petroleum prices on Friday as overwhelming fears
of demand destruction enveloped energy markets, erasing gains dating back to August. This
was the largest one-day drop since April 20, 2020 and was the seventh largest daily drop in the
history of ICE Brent futures. Prices fell for a fifth consecutive week and now stand at 11 week
lows. On Friday, WTI fell 13.1%, Brent 11.6%, Gasoline 12.5% and ULSD 12.1%. Friday’s price
plunge was exacerbated by exceptionally low volume as it was a shortened trading day due to
the Thanksgiving holiday. The severity of the price drop will now likely lead to OPEC+ scuttling
plans for another increase in monthly output. OPEC+ is scheduled to convene virtually this week
in Vienna. It remains to be seen if five countries including the US and China that announced
releases from their Strategic Petroleum Reserves will follow through. Despite Friday’s sharp price
drop, global inventories have been falling. Total commercial petroleum inventories in the United
States fell by 6 MB in the past week.

US equity indexes also fell sharply, especially on Friday when the DJIA fell 2.5%, the S&P 2.3%
and the NASDAQ 2.2% in what was also a low volume, shortened trading day. On the week, the
DJIA lost 2%, the S&P 2.2% and the NASDAQ 3.5%. The dollar index remained unchanged,
settling the week at 96.07. Gold prices fell in concert with equities and energy, dropping by
$54.50 per ounce on the week to settle at $1,792.30.

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The new Covid variant, B 1.1529 also referred to as the Omicron variant, has emerged in South
Africa and has spread to neighboring nations including Botswana as well as Hong Kong and
Israel. Four major pharmaceutical firms with Covid vaccines now available are actively seeking
immunity solutions for this strain which apparently has 30 different mutations. Travel
restrictions are in the process of being imposed by various countries to stem Omicron’s spread.

A major US business daily stated that both Russia and Saudi Arabia were considering a pause
in the OPEC+ agreement that has been increasing output incrementally by 400 KBPD each
month as a response to announcements of varying certainty by five countries, including the
United States and China, that they would release inventories from their Strategic Petroleum
Reserves. This news of the considered pause in output increases was made prior to the sharp
reductions in prices of Friday. The US has indicated a 50 MB release from the SPR with 32 MB
effectively being a loan of Crude that must be replaced at a later date. China has been
noncommittal on a release from its SPR and has publicly expressed reluctance to do so. Chinese
Crude imports have recently fallen to three-year lows. India has pledged a release of 5 MB of
its reserves with quantities from Japan and Korea unknown at this time. A release from the five
countries cited above would be unlikely to exceed 45 MB. This would only equate to roughly 10
hours of global Crude demand.

US Crude inventories rose for the fourth week in five, rising by 1.017 MB. Crude stocks continue at 7% below
their five-year average and are 54.7 MB below levels of last year at this time. The price of WTI fell by $7.95 on
the week. Inventories in the three PADDs affected by trans-Atlantic trade actually fell by 2.086 MB. Inventories
in PADD 5, the geographically isolated US Pacific Coast, gained by a disproportionately large 3.048 MB on the
week. The reduction in PADD 3, the US Gulf Coast, of 2.618 MB was significant and largely attributable to
refinery utilization rates in PADD 3 reaching 12-month highs as the national utilization rate rose by one full
percentage point to 88.6% of capacity. Inventories at the Nymex delivery point of Cushing Oklahoma increased
by 787 KB on the week, rising for a second week in a row and second week in seven. Inventories in Cushing are
now at four week highs but remain 47% below their five-year average. Domestic production recovered by 100
KBPD this week and now stands at 11.5 MBPD. Crude imports increased unexpectedly by 245 KBPD to reach a
level of 6.436 MBPD. Again, the activities on the US Pacific Coast are largely to blame for this statistic. We
expect imports to fall in the week ahead and utilization to increase slightly. This, coupled with anticipated flat
production, should result in Crude inventories falling in the week ahead by 0.5 to 1.0 MB

US Gasoline inventories fell for a seventh consecutive week and seventh in nine, dropping by 603 KB. Gasoline
inventories are now 6% below their five-year average and are 18.7 MB below levels of last year at this time. US
Gasoline inventories continue to remain near their lowest levels in four years. The price of Gasoline fell by 1825
points on the week. Gasoline stocks in the three PADDs affected by trans-Atlantic trade fell by 12 KB this week.
A negligible reduction of 17 KB in PADD 1 and a more significant reduction of 478 KB in PADD 3 were nearly
offset by a 483 KB gain in PADD 2. Inventories in the PADD 1 subsection that encompasses New York Harbor,
the Nymex delivery point, fell by 461 KB. This was largely affected by a sharp reduction in imports, as expected,
of 340 KBPD. Imports now stand at 483 KBPD. Shipping data indicates a continued limited flow of imports as
the trans-Atlantic freight market remains firm. Gasoline demand increased by 1% to 9.334 MBPD, the ninth
consecutive week demand has risen. Flat to slightly lower imports, a slight increase in production and a sharp
rise in demand linked to the Thanksgiving holiday should result in Gasoline inventories dropping by 2.5 to 3.0
MB in the coming week.

US Distillate inventories fell for a seventh week in eight, dropping by 1.968 MB. US Distillate inventories are
now 8% below their five-year average and are 20.9 MB below levels of last year at this time. The price of ULSD
fell by 1986 points on the week. Overall US Distillate inventories remain near their lowest levels in more than
31 months. Distillate inventories in the three PADDs affected by trans-Atlantic trade fell by 1.667 MB. The
reduction was most pronounced in the US midcontinent where inventories fell by 1.278 MB which was linked to
thermal needs. Distillate inventories fell slightly in PADD 3, the US Gulf, dropping by 707 KB as the flow of
exports increased slightly, touching 1 MBPD. Shipping data indicates the flow of exports will likely be near
unchanged in the week ahead. On the week, demand increased by 1% and is now 8% over its five-year average
at 4.391 MBPD. We expect demand to outpace increases in production, with exports to remain near unchanged.
This should result in Distillate inventories falling by 3.0 to 3.5 MB in the week ahead.

A pause in OPEC+ output was already likely before the sharp price drops of Friday. It is now considered possible
that OPEC+ may not only freeze output gains but may even reduce output given Friday’s price behavior. It is
likely that the relatively limited scope and reach of a release from Strategic Petroleum Reserves will serve to
reinforce the control that OPEC+ has on global supplies and prices. The limited volume of Friday’s trade due to
its association with a major US holiday should also contribute to a likely strong price recovery in the week ahead.
One glaring exception to Friday’s price plunge was the fact that Natural Gas prices actually increased. Previous
profound movements in price both up and down have had their sustainability defined in part by the Natural Gas
market sharing a common direction. We expect outright prices to recover substantially in the week ahead.

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