Market Summary: December 26, 2021

Petroleum prices increased this week in abbreviated preholiday trading. Prices trended upward in both Crude and refined products despite clear evidence of reduced demand linked to the Omicron variant of Covid-19. Price support was derived from expectations of very limited impact on long-term demand from Omicron, significant dollar weakness, a sharp reduction in Crude inventories in the United States, increasing geopolitical tensions with Russia regarding Ukraine, continued OPEC+ production discipline and a major refinery fire on the US Gulf Coast. After dropping sharply on Monday, prices are at or near one-month highs. On the week, WTI gained 4.3%, Brent 3.5%, ULSD 5% and RBOB 3.97%.

The Federal Reserve has now clearly stated that it would stop buying its own bonds starting in March with the further possibility of as many as three increases in the cost of money in 2022. Such dollar weakness enabled equity indexes to increase. On the week, the Dow gained 1.7%, the S&P 2.3% and the NASDAQ 3.2%. The dollar index gave back virtually all of its gains of last week based on expectations of the Federal Reserve. The dollar index settled at 96.06, a loss of 0.61 on the week. Gold prices increased in line with expectations from dollar weakness, rising by $13.10 per ounce to settle at $1,811.70.

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Treatments for the less virulent but highly contagious Omicron variant of Covid-19 were released by two major pharmaceutical companies this week that will further limit the effects of this most recent variant. This news, despite the overwhelming near term concerns of rampant contagion, was one of the main reasons prices were able to rise on the week.

A fire at the 561 KBPD ExxonMobil refinery in Baytown Texas, the fourth largest refinery in the US, injured four workers as a fireball from the incident was visible for a number of miles around the plant. Though the extent of the damage and the duration of any unit outages is unclear at the time of this writing, aerial photos indicate a reformer, a BTX unit and a cooling tower appear to have been damaged. This would indicate a loss of Gasoline production. In the two trading days since this event, Gasoline cracks have remained essentially unchanged though limited clarity of the damage and limited volumes traded appear to have contributed to the lack of movement in the relative value of Gasoline in the Gulf Coast and elsewhere in the three PADDs affected by trans-Atlantic trade.

A force majeure has been declared for Forcados production in Nigeria as well as all Libyan production. These issues coupled with ongoing production problems in Angola have enabled OPEC+ compliance to its output agreement to remain at a level of 117%.

Another week of sales from the US Strategic Petroleum Reserve have rendered these stockpiles to 596 MB, a 19 year low.

US Crude inventories decreased for a fourth week in nine, dropping by 4.715 MB. Crude stocks are now 8% below their five-year average and are 75.9 MB below levels of last year at this time. The price of WTI gained $2.93 on the week. Inventories in the three PADDs affected by trans-Atlantic trade fell by 3.32 MB. The inventory reduction was most significant again in PADD 3, the US Gulf Coast, where stocks fell by 3.308 MB. This reduction was again primarily driven by solid export flows that eased slightly in the past week but still remain high at 2.879 MBPD. Shipping data continues to confirm an elevated flow of exports of Crude from the US in the near term. Inventories at the Nymex delivery point of Cushing Oklahoma increased again for the sixth consecutive week. Cushing inventories rose by 1.463 MB on the week and have gained more than 5 MB or more than 18% in the last three weeks. Refinery utilization rates were unchanged this past week. We expect utilization rates to remain similar in the week ahead and further anticipate exports increasing and production remaining static. We therefore believe that Crude inventories will fall in the coming week by 2.0 to 2.5 MB.

US Gasoline inventories increased for the third week in 11, rising by 5.533 MB. Gasoline inventories are now 4% below their five-year average and 13.7 MB below levels of last year at this time. The price of Gasoline gained 844 points on the week. Gasoline stocks in the three PADDs affected by trans-Atlantic trade increased by 4.383 MB. The increases were significant in all three districts but were the largest in PADD 2, the US midcontinent, where stocks gained by 1.711 MB. Last week’s sharp reduction in Gasoline inventories shifts to secondary storage in advance of the holiday week gave way to more seasonal demand expectations as demand fell by 486 KBPD. We were surprised at the increase of imports in Gasoline of 189 KBPD to a level of 688 KBPD. We do not expect the flow of imports to increase in the week ahead as shipping data would indicate a slight reduction in chartering. Expectations of flat production and demand as well as lower imports lead us to expect that Gasoline inventories will increase in the week ahead but by a much smaller amount than this past week. We believe Gasoline inventories will increase in the week ahead by 3.0 to 3.5 MB.

US Distillate inventories increased for a fourth week in 12, rising by 396 KB. US Distillate inventories are 8% below their five-year average and are 24.7 MB below levels of last year at this time. The price of ULSD increased by 1115 points on the week. Distillate inventories in the three PADDs affected by trans-Atlantic trade gained by 407 KB. The increase was disproportionately large in PADD 3, the US Gulf Coast, where stocks rose by 858 KB. This occurred despite an increase in exports, as we expected, of more than 300 KBPD to a level of 1.176 MBPD. Even though the flow of exports increased, freight rates which had been rising until last week leveled off as is common for the last week or two of the year. Expectations of flat production, flat exports and quite possibly flat demand lead us to believe that Distillate inventories will again remain within 500 KB of unchanged in the coming week.

Though outright price trends are clearly higher, at least on a daily basis, and damages occurred to the fourth largest refinery in the United States, the trading in another holiday shortened week is likely to be limited with relatively skittish behavior. We would only advocate following trends in very short time frames during liquid trading hours.

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