Petroleum prices fell for the seventh week in eight as renewed concerns about the rapid spread of the Omicron variant of the Covid-19 virus, associated expectations of renewed travel and movement restrictions and a stronger dollar based on anticipated moves by the Federal Reserve to arrest rapid inflation all weighed on prices. Prices had reached three-week highs midweek due to exceptionally bullish EIA statistics which showed a reduction in total US commercial petroleum inventories of 16 MB, US Strategic Petroleum Reserve inventories falling to 19-year lows and remnant geopolitical tensions regarding Russia and Ukraine as well as Iran. On the week, WTI fell by 1.1%, Brent 2.2%, Gasoline 0.7% and Distillate 1.1%.
Alarmingly high inflation which resulted in comments from the Federal Reserve citing the likelihood of interest rate increases and a further tapering in the Federal Reserve’s bond buyback policy weighed on equity indexes. On the week, the Dow fell 1.7%, the S&P 1.9% and the NASDAQ 2.9%. The dollar index approached monthly highs, rising to 96.67, a gain of 0.62 on the week. Gold prices increased slightly, rising by $16.50 per ounce to settle at $1,798.60.
Implied demand for petroleum in the United States rose to a record high this week of 23.191 MBPD, breaking the record of 22.82 MBPD set during the week of August 27. The demand increase across the board is largely attributable to the shift of inventories to secondary storage in advance of the holidays as well as the common end of year practice by refineries to reduce inventories, driven by tax efficiencies.
Travel restrictions have been reimposed to varying degrees in both France and the UK. No further restrictions have yet been imposed in any region of the US. Growth in new cases of the Omicron variant now stands at 120,000 per day in the US. Some statistics, varied by location, appear to be indicating a doubling in cases every 2 to 3 days.
The Paris-based IEA trimmed its demand forecast for 2022 by 100 KBPD to a level of 3.3 MBPD, resulting in a projected daily demand figure of 99.5 MBPD. The IEA further stated that global stocks will have fallen by 240 MB in 2021.
The US government-based EIA adjusted its daily demand increase for 2022 to 3.4 MBPD resulting in a daily demand figure of 100.5 MBPD.
OPEC raised its daily demand increase for 2022 to 4.2 MBPD resulting in a daily demand figure of 100.6 MBPD.
US Crude inventories decreased for a third week in eight, dropping by 4.584 MB. Crude stocks remain 7% below their five-year average and are now 71.8 MB below levels of last year at this time. The price of WTI fell $0.81 on the week. Inventories in the three PADDs affected by trans-Atlantic trade fell by 4.488 MB. Inventory reduction was most significant in PADD 3, the US Gulf Coast, where stocks fell by 3.83 MB. This reduction was driven in small part by a drop in imports of 28 KBPD and in a much larger part by an increase in exports of 1.375 MBPD to a level of 3.645 MBPD. Shipping data as well as analysis of the WTI/Brent spread show the flow of US exports easing in the week ahead. Inventories at the Nymex delivery point of Cushing Oklahoma increased again, rising by 1.294 MB. Given last week’s significant increase, stocks at Cushing have now risen in the last two weeks by 3.667 MB, more than 10% of current inventories which stand at 32.211 MB. We expect refinery utilization rates to fall slightly in the week ahead. We further expect production and imports to remain near unchanged and exports to fall for reasons cited above. We therefore expect US Crude inventories will fall by 1.5 to 2.0 MB in the coming week.
US Gasoline inventories decreased for the eighth week in 10, falling by 719 KB. Gasoline inventories are now 6% below their five-year average and 20.3 MB below levels of last year at this time. The price of Gasoline fell by 236 points on the week. Gasoline stocks in the three PADDs affected by trans-Atlantic trade fell by 855 KB. The reduction was most significant in PADD 3 where stocks fell by 2.187 MB. Regional demand for the holidays, pipeline injections and exports to Central and South America drove the reduction in stocks. Inventories in the PADD 1 subsection that encompasses New York Harbor, the Nymex delivery point, increased by 523 KB despite a reduction in imports of 59 KBPD to a level of 499 KBPD. Shipping data indicates a significant reduction in the flow of European Gasoline to the US Atlantic region in the coming week. We expect imports to fall below 400 KBPD in the week ahead. The most telling statistic regarding Gasoline this week was the sharp increase in demand by 509 KBPD to a level of 9.472 MBPD, a figure more commonly seen in summer driving season. As mentioned earlier, a strong flow of inventories to secondary storage in advance of the Christmas week is a significant cause for the increase in demand. Given the prospects of lower production and imports in the week ahead and possibly static demand, we expect Gasoline inventories to remain within 500 KB of unchanged in the week ahead.
US Distillate inventories fell for the eighth week in 11, dropping by 2.852 MB. US Distillate inventories are 9% below their five-year average and are 27.5 MB below levels of last year at this time. The price of ULSD fell by 317 points on the week. Distillate inventories in the three PADDs affected by trans-Atlantic trade fell by 2.253 MB. The reduction was most pronounced in PADD 1, the US Atlantic, where stocks fell by 1.401 MB. The reduction was conspicuously lower in PADD 3, the US Gulf Coast, where stocks fell by 78 KB. There was a 445 KBPD reduction in Distillate exports as freight rates, though volatile, appear to have plateaued in the US Gulf. A number of ships were chartered prior to reaching this plateau and exports could rise substantially next week to a level of 1.3 MBPD. Lower production and an increase in exports next week should compensate for the expected reduction in demand from the lofty level of 4.896 MBPD, which was reflected in the weekly increase in demand of 1.318 MBPD, to a much more seasonal level of 3.8 or 3.9 MBPD. This would result in Distillate inventories remaining within 500 KB of unchanged in the coming week.
There appears to be an emerging view the markets will be oversupplied in the month of January. Reduced demand is somewhat common in the first weeks of the year and may be exacerbated due to expanding effects of the Omicron variant. Structure in both Crudes and refined products recovered this week on a daily basis but is still trending negative on a weekly basis. We expect markets to be thinly traded and somewhat range bound to possibly slightly lower in the upcoming holiday shortened week.