Market Summary: January 23, 2022

Petroleum prices increased for a fifth consecutive week, touching seven-year highs midweek as
dated Brent briefly touched $90 before easing at week’s end on profit-taking as well as a sharp
reduction in equities due to inflation driven increases in treasury yields. Perceptions of an
undersupplied market, OPEC+ continuing to fall short of production increase targets, resilient post
Omicron demand in the US and other key markets, severe cold in the northern hemisphere and
geopolitical issues which include the threat of Russia’s invasion of Ukraine and Iranian-back Houthi
rebel drones attacking the UAE all contributed to market strength. Total commercial petroleum
inventories fell by 1.5 MB. On the week, WTI gained 2.2%, Brent 2.1%, RBOB 1% and ULSD 2.2%.

Treasury yields increased sharply this week in anticipation of a number of rate increases from the
Federal Reserve linked to rampant inflation that stands at 40-year highs. On the week, the DJIA lost
4.6%, the S&P 5.7% and the NASDAQ 7.6%. The dollar index increased by 0.47 to settle at 95.64 and
gold increased by $18.60 per ounce to settle at $1,836.10.

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Total commercial petroleum inventories in the United States fell for the 56th week in the last 81,
down by more than 273 MB since July 2020 and are 4% below pre-pandemic five-year averages.

The IEA increased its demand forecast for both 2021 and 2022 by 200 KBPD. At the same time, the
IEA also lowered supply forecasts by a similar amount. For the first time, the Paris-based research
group sees a supply shortfall in the first quarter of 2022. They also see an increase in global refinery
utilization of more than 100 KBPD in calendar 2022. Perhaps their most alarming statistical
observation was that they only see OPEC+ spare capacity as approximately 5 MBPD.

OPEC issued a report largely echoing the findings of the IEA though they see no change in demand
increases for calendar 2022.

OPEC+, restrained by output issues in Libya, Angola, Russia, Kazakhstan and Nigeria, continue to
maintain output compliance to their agreement at more than 120%.

A fire on the Kirkuk – Ceyhan pipeline that carries Crude from northern Iraq to the Turkish
Mediterranean interrupted flows for slightly more than a day midweek prior to repairs.

US Crude inventories increased for the first week in nine, increasing by 515 KB. Crude stocks remained 8%
below their five-year average and are 72.8 MB below levels of last year at this time. The price of WTI gained
$1.32 on the week. Inventories in the three PADDs affected by trans-Atlantic trade gained by 949 KB.
Inventories grew disproportionately in PADD 3, the US Gulf Coast, where stocks increased by 2.189 MB. This
increase was due in part to national refinery utilization rates falling to their lowest levels since November.
Inventories at the Nymex delivery point of Cushing Oklahoma also dropped for the second week in a row,
falling by 1.314 MB. In a bit of a surprise, Crude exports increased by 700 KBPD, rising to 2.61 MBPD. Crude
imports to the US increased by 676 KBPD, a number that is reflected in the growth of inventories in PADD 3
cited above. We expect utilization rates to fall slightly in the week ahead with shipping data indicating a
consistent flow of imports. We therefore expect Crude inventories to rise by 1.0 to 1.5 MB in the week ahead.

US Gasoline inventories increased for a third consecutive week, rising by 5.873 MB. Gasoline inventories are
now 2% above their five-year average and 1.4 MB above levels of last year at this time. The price of Gasoline
gained 234 points. Gasoline stocks in the three PADDs affected by trans-Atlantic trade gained by 5.353 MB.
The increase was most pronounced in PADD 3, the US Gulf Coast, where stocks increased by 2.865 MB. This
increase occurred as Gasoline production increased by 114 KBPD. Demand increased by 318 KBPD to a level
of 8.224 MBPD, an improvement but still a very low figure. Imports fell by a surprising 198 KBPD to a level of
391 KBPD. Despite this significant reduction in imports to a five-year average low, inventories in the PADD 1
subsection that encompasses New York Harbor, the Nymex delivery point, only increased by 230 KB. This is
the third week of January with conspicuously cold weather but the country is still in the throes of recovery
from the Omicron virus and seasonal demand figures are low. A reduction in refinery utilization, relatively
flat import flows and no significant increase in demand should result in Gasoline inventories increasing by
2.5 to 3.0 MB in the coming week.

US Distillate inventories fell for the first week in three, dropping by 1.431 MB. US Distillate inventories are
now 16% below their five-year average and are 35.7 MB below levels of last year at this time. The price of
ULSD gained 569 points on the week. Distillate markets remain firm in every major global hub. Distillate
inventories in the three PADDs affected by trans-Atlantic trade fell by 317 KB. The reduction was
disproportionately large in PADD 1, the US Atlantic, where thermal demand linked to severe winter weather
increased significantly. US Distillate stocks are now at their lowest seasonal level in the last eight years.
Distillate inventories fell despite having a drop in the flow of exports to a level of 683 KBPD. Shipping data
indicates a small increase in the flow of exports in the week ahead. Lower utilization rates, a slight increase
in exports and probable static demand at 4.556 MBPD should lead to another reduction in US Distillate
inventories by 2.0 to 2.5 MB in the week ahead.

Fundamentally, Distillate is and should remain the strongest relative value in the petroleum complex;
Gasoline should remain the weakest. Crude structure which wavered in the second half of the week will likely
determine outright price direction. Given the likelihood of a stronger dollar due to eventual interest rate
increases, we suspect prices will remain firm but somewhat range bound in the week ahead.

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