Increasing confidence in the containment and treatment of the Omicron variant of the Covid-19 virus thus easing demand reduction concerns as well as strong inflationary pressures helped propel petroleum prices to their first weekly gain in seven. Rising geopolitical issues regarding Russia and the Ukraine as well as Iran were also price supportive. This was the largest weekly gain in petroleum prices since the week ending August 27. On the week, WTI gained 8.2%, Brent 7.5%, RBOB 9.4% and ULSD 7.3%. Though prices increased, petroleum inventory numbers appeared bearish which resulted in relative weakness in the structure of Crude, Gasoline and ULSD futures.
Another sharp rise in the rate of inflation to a 40-year high of 6.8% and the growing likelihood that the Federal Reserve will soon increase the cost of the dollar to address inflationary pressures failed to limit gains in equity indexes. On the week, the Dow gained 4%, the S&P 3.8% and the NASDAQ 3.6%. The dollar index fell slightly by 0.10 to settle the week at 96.05. Similar to the dollar index, gold was also near unchanged on the week, settling $0.80 lower at $1,783.10 per ounce.
Two leading pharmaceutical vaccine providers stated results from initial laboratory studies showed the Omicron variant of the Covid-19 virus was neutralized after three doses of their vaccines. Despite such news, a number of European countries were slow to ease restrictions recently reimposed for the Omicron variant.
As expected, attempts to revive Iranian nuclear discussions this week have failed and US government agencies have resumed their quest to tighten sanctions against Iran. Russian troops and military equipment continue to amass along its border with Ukraine. Stern warnings from the US president and select European leaders regarding consequences should an invasion occur have failed to reverse the buildup.
By increasing monthly production by 400 KBPD, OPEC took a risk that the emergence of the Omicron variant of Covid-19 would not affect demand and as a consequence prices. It now appears that their continuation of the policy of gradual increases was justified. Their statement that they would remain flexible in their production levels due to the Omicron variant and compliance among OPEC+ members at 112% clearly aided recent price improvements.
The US government-based EIA lowered its projected spot price for Brent for the balance of 2021 to $70.60 from $71.59. They also lowered the projected spot price for 2022 from $71.91 to $70.05.
US Crude inventories decreased for a third week in seven, dropping by 241 KB. Crude stocks are now 7% below their five-year average and are 70.3 MB below levels of last year at this time. The price of WTI gained $5.41 on the week. Inventories in the three PADDs affected by trans-Atlantic trade increased by 689 KB. Inventories in PADD 1, the US Atlantic, fell by 1.228 MB while stocks gained in the midcontinent and Gulf Coast. Inventories at the Nymex delivery point of Cushing Oklahoma experienced their largest weekly increase since January, rising by 2.373 MB. Inventories in Cushing now exceed the psychologically important barrier of 30 MB. Cushing stocks still remain more than 40% below their five-year average. Domestic production rose again, increasing by 100 KBPD to 11.7 MBPD. Domestic production stands at near two-year highs. US Crude exports fell to a level of 2.27 MBPD, facilitated by increases in production and inventories at Cushing. Even though the reduction in Crude inventories was smaller than expected, US Crude inventories remain 14% below last year. With expectations of unchanged utilization and production coupled with a probable increase in exports, we expect Crude inventories will fall by 1.5 to 2.0 MB in the week ahead.
US Gasoline inventories increased for the second consecutive week and second week in nine, rising by 3.882 MB. Gasoline inventories remain 5% below their five-year average and are 18.6 MB below levels of last year at this time. The price of Gasoline increased 1843 points on the week. Gasoline stocks in the three PADDs affected by trans-Atlantic trade gained by 3.95 MB. The growth was most significant in PADD 1, the US Atlantic, where stocks increased by 3.95 MB. Inventories in the PADD 1 subsection that encompasses New York Harbor, the Nymex delivery point, rose by 2.187 MB. This occurred despite a reduction in imports of 85 KBPD to a level of 558 KBPD. Shipping data indicates a slightly lower flow of imports in the week ahead. The sharp drop in demand of last week of 538 KBPD was only countered slightly by an increase in demand this week of 167 KBPD to a level of 8.963 MBPD, a level that is slightly low for this time of year. We expect production and demand to be unchanged in the week ahead. We further expect to see a small reduction in imports. We therefore anticipate Gasoline inventories will gain by 2.0 to 2.5 MB in the coming week.
US Distillate inventories increased for a third week in 10, rising by 2.733 MB. US Distillate inventories are 7% below their five-year average and are 24.5 MB below levels of last year at this time. The price of ULSD gained 1532 points on the week. Distillate inventories in the three PADDs affected by trans-Atlantic trade gained by 1.689 MB. The gain was most pronounced in PADD 1, the US Atlantic, where stocks increased by 2.867 MB. As cited as a probability last week, inventories in PADD 3, the US Gulf Coast, fell significantly, dropping by 1.77 MB. This reduction was due in large part to a sharp increase in exports to a level of 1.218 MBPD that drove freight prices significantly higher. We anticipate the flow of exports to remain somewhat similar to those of last week. Though freight rates have increased sharply, it appears possible that a plateau is approaching. Distillate demand appeared conspicuously low at 3.578 MBPD. We expect this figure to increase substantially in the week ahead. Expectations for unchanged production, increasing demand and elevated exports should result in Distillate inventories being within 500 KB of unchanged in the week ahead.
Outright price trends are now positive on a daily basis but negative to mixed on a weekly basis. Though outright prices are expected to increase in the near term, we expect such increases to be limited as pricing structure in the three main Nymex contracts is clearly trending lower.