Market Summary: December 4, 2021

Petroleum prices fell for a sixth consecutive week, the longest such streak of weekly losses since November 2018. Expected reduction in global petroleum demand due to the emergence of the Omicron variant of Covid-19 and the decision of OPEC+ to maintain the course of monthly output increases of 400 KBPD despite the Omicron variant were the key price influences of the past week. Total weekly commercial petroleum inventories in the US increased by 4.3 MB. On the week, the price of WTI fell by 2.8%, Brent 2.4%, and RBOB 1.4% while ULSD prices actually increased by 0.4%. The petroleum market appears to have bottomed out on Thursday and Friday as OPEC+ stated they have left the door open to revisiting output increases at any time. Comments from a number of analysts stating the market was oversold and scientists claiming this variant of Covid-19 appears less severe support the view that a bottom has been set.

A much weaker than expected jobs report was the key news feature in US equity indexes. As a consequence, markets fell with the Dow dropping by 0.9%, the S&P 1.2% and the NASDAQ 2.6% on the week. The dollar index remained near unchanged, gaining .08 to close the week at 96.15. Gold prices fell by $8.40 per ounce to end the week at $1,783.90.

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Despite OPEC+ adherence to its 400 KBPD monthly output increase, the current US administration plans to proceed with a release from its Strategic Petroleum Reserve of up to 50 MB, 32 MB of which would be replaced at a later date. Similar to last week, China remains muted on its policy of releasing barrels from its Strategic Petroleum Reserve. India, Japan and Korea, the other countries that had been involved in such discussions, have also failed to state any specific plans for releases.

Three geopolitical issues are currently simmering and have yet to have shown a specific influence on petroleum prices. US intelligence reports a sharp increase in troop activity in Russia near the Ukrainian border. It appears increasingly likely that Russia may stage an incursion into Ukraine in the near term. Bellicose rhetoric from China continues regarding its claims to Taiwan and its one China policy. An apparently hopeless situation is emerging in Vienna as attempts to restart nuclear discussions with Iran are foundering as the Iranian representatives have presented a lengthy list of demands that must be met prior to discussions formally resuming.

Analysts from two major European investment banks have projected what appears to be a worst-case scenario that closures linked to Omicron’s emergence could cut global petroleum demand by up to 3 MBPD in the first half of 2022. A major US investment bank maintains its view that petroleum demand in the first quarter and half of 2022 will continue to increase, thus enabling prices to far exceed $80 per barrel.

US Crude inventories fell for a second week in six, dropping by 909 KB. Crude stocks are now 6% below their five-year average and are 54.9 MB below levels of last year at this time. The price of WTI fell by $1.89 on the week. Inventories in the three PADDs affected by trans-Atlantic trade fell by 113 KB. Inventories in PADD 3, the US Gulf Coast, fell by 2.86 MB while inventories in PADD 2 gained by 2.496 MB. The reductions in PADD 3 occurred as utilization rates in the region remain high. Inventories at the Nymex delivery point of Cushing Oklahoma which is encompassed by PADD 2 accounted for nearly half the gains in the region, rising by 1.159 MB on the week. Overall Cushing inventories remain low, standing at roughly 38% of capacity and are 46% below their five-year average. Domestic production increased by another 100 KBPD this week and now stands at 11.6 MBPD. This is the highest rate of domestic production since May 2020. US Crude exports improved slightly but still remain low at 2.7 MBPD. The delta between WTI and Brent is widening and should facilitate the flow of further exports in the coming week. This increase in exports and likely static imports, refinery utilization and production should result in a reduction in US Crude inventories in the coming week of 1.5 to 2.0 MB.

US Gasoline inventories increased for the first week in eight, rising by a substantial 4.029 MB. Gasoline inventories are now 5% below their five-year average and 18.2 MB below levels of last year at this time. The price of Gasoline fell 765 points on the week. Gasoline stocks in the three PADDs affected by trans-Atlantic trade gained by a substantial 3.889 MB. The growth was most significant in PADD 3, the US Gulf Coast, where stocks rose by 2.389 MB. Inventories in the PADD 1 subsection that encompasses New York Harbor, the Nymex delivery port, actually fell by 309 KB. This occurred despite a surprising increase in imports of 160 KBPD. The most conspicuous figure in Gasoline statistics was the sharp drop in demand of 538 KBPD to a level of 8.796 MBPD. This figure is most unusual and we anticipate a significant increase in this figure next week and would not rule out a possible correction to this figure. Shipping data indicates a somewhat static flow of imports are to be expected in the week ahead. With refinery utilization rates likely unchanged along with production and with the expected adjustment and increase in demand, we anticipate US Gasoline inventories will be within 500 KB of unchanged in the week ahead.

US Distillate inventories increased for a second week in nine, rising by 2.16 MB. US Distillate inventories are now 9% below their five-year average and 22.0 MB below levels of last year at this time. The price of ULSD gained by 39 points on the week. Overall US Distillate inventories are still near 31-month lows. Distillate inventories in the three PADDs affected by trans-Atlantic trade gained by 1.759 MB. The gain was most pronounced in PADD 1, the US Atlantic, where stocks increased by 1.391 MB. Stocks were nearly unchanged in PADD 3, the US Gulf Coast, rising by only 7 KB. The increase in MR2 inquiries in the US Gulf Coast this past week was quite significant and the number of fixtures was disproportionately higher than previous weeks. This increase in chartering activity and freight rates is likely to be reflected in next week’s statistics which should show a significant reduction in Distillate inventories in PADD 3. National demand fell by less than half of 1%, a figure that is likely to be reversed next week given probable thermal demand increases. With utilization rates likely unchanged, reasonable expectations for a slight increase in demand and a significant increase in exports which should reduce inventories in PADD 3 substantially, we expect US Distillate inventories will fall next week by 2.5 to 3.0 MB.

A number of technical analysts are of the view that the midday lows of Thursday may have established a short-term floor for prices. The fact that OPEC expressed an openness to reconsider this month’s production increase and also due to the fact that there are a number of geopolitical factors that may escalate soon, expectations are for near-term price increases. On the negative side, our comments made last week that Natural Gas prices had failed to react in the same direction concurrently with petroleum were borne out as Natural Gas prices did fall by 25% this week before staging a brief recovery on Friday. We expect a volatile market with prices trending higher in the week ahead.

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