Petroleum prices fell for the first week in nine as continued tensions on the Russian Ukrainian border which appear to be poised for rapid escalation to an invasion were offset by apparent progress in the ongoing multinational Iranian nuclear discussions. Were talks to result in an agreement, it is anticipated that Iran would be in a position to fill the more than 1 MBPD production shortfall in the OPEC+ agreement as early as the third quarter of 2022. Prices eased after reaching their highest levels mid-week since 2014 as the price of WTI traded below $90 at times on Friday. Nearby price structure also fell considerably. On the week, WTI fell 2.2%, Brent 1%, RBOB 2.5% and ULSD 4.5% as US commercial petroleum inventories increased by 1.2 MB. Despite weaker pricing, global petroleum inventories remain very low.
Four decade high inflation and emerging expectations of an accelerated timeline of rate increases from the Federal Reserve weighed on US equity indexes. On the week, the DJIA lost 1.9%, the S&P 1.6% and the NASDAQ 1.8%. The dollar index increased slightly, rising by .08 to settle at 96.11. Gold prices reached eight month highs on Thursday before easing on Friday yet still gained 3.1% on the week, the strongest weekly gain in 10 months, increasing by $39.20 per ounce to settle at $1,899.80.
As stated above, petroleum inventories, driven by ongoing economic expansion and constrained global production continue to fall to dangerously low levels both globally and in the US, specifically:
- OECD commercial petroleum inventories have fallen by 14.2% in the last 18 months and are now at nine year seasonal lows;
- OECD commercial inventories are more than 8% below their five year seasonal average;
- OPEC+ output remains 1.18 MBPD below current export quotas as a growing number of participating members for varying reasons cannot reach output targets;
- Crude, Gasoline and Distillate inventories in the US are all below five year lows;
- US Distillate inventories are 18% below their five year average and are at their lowest level for this time of year since 2014;
- At their current rate of consumption and depletion, US Distillate stocks are on a trajectory to reach 15 year lows by the end of May;
- Crude inventories in Cushing Oklahoma are more than 42% lower than last year at this time and stand at their lowest levels since 2018.
US Crude inventories increased for a third week in five, rising by 1.121 MB. Crude stocks are 10% below their five year average and are 50.3 MB below levels of last year at this time. Crude stocks continue below their five year average low and are near their lowest levels in nearly four years. The price of WTI fell by $2.03 on the week. Inventories in the three PADDs affected by trans-Atlantic trade fell by 1.143 MB. The reduction was disproportionately pronounced in PADD 2, the US mid-continent, where stocks fell by 2.862 MB. Inventories in Cushing Oklahoma which is encompassed by PADD 2 fell for a sixth consecutive week, dropping by 1.9 MB. As previously stated, Cushing inventories are more than 42% lower than last year and are now at their lowest level since 2018. Mid-continent inventories fell despite a reduction in Crude exports of 420 KBPD to a level of 2.376 MBPD. The increase in overall stocks was driven by a reduction in refinery utilization of 3% to 85.3% of capacity. We expect utilization to continue to fall by a slightly smaller amount next week. We further expect production to remain unchanged, imports to fall slightly and exports to increase slightly based on recent shipping data. This should lead to US Crude stocks being within 500 KB of unchanged in the coming week.
US Gasoline inventories fell for a second week in seven, falling by 1.332 MB. Gasoline inventories remain 3% below their five year average and are 10.0 MB below levels of last year at this time. The price of Gasoline fell 690 points on the week. The average price at the pump in the US is now $3.52 per gallon. Gasoline inventories in the three PADDs affected by trans-Atlantic trade fell by 437 KB. The reduction was most pronounced in PADD 3, the US Gulf Coast, where stocks fell by 1.739 MB. Exports, pipeline flows and domestic shipping all contributed to the reduction. Inventories in the PADD 1 subsection that encompasses New York Harbor, the Nymex delivery point, increased by 825 KB. This was facilitated in large part by an increase in imports of 41 KBPD to a level of 555 KBPD. Trans-Atlantic freight rates for Gasoline cargoes have remained firm which should lead to an increase in imports next week. Demand fell to more seasonal levels, dropping by 556 KBPD to a level of 8.55 MBPD, a level that is likely to be sustained in the week ahead. A small increase in imports, unchanged demand and likely static production should lead to Gasoline inventories being within 500 KB of unchanged in the week ahead.
US Distillate inventories fell for a fifth consecutive week, falling by 1.552 MB. Distillate inventories remain 19% below their five year average and are 37.4 MB below levels of last year at this time. The price of ULSD fell by 1616 points on the week. Inventories in the three PADDs affected by trans-Atlantic trade fell by 1.602 MB. Similar to Gasoline, the reduction was most pronounced in PADD 3, the US Gulf Coast, where stocks fell by 2.236 MB. High demand in South America continues to provide support for freight which rose considerably in the past week. Inventories rose in PADD 1, the US Atlantic, by 1.025 MB as thermal needs have eased somewhat. Static production, a continued flow of exports from the Gulf Coast and demand that is expected to be at or near unchanged will likely result in Distillate stocks falling in the coming week by 1.5 to 2.0 MB.
It appears that a Russian invasion of Ukraine is more likely than a treaty between a number of countries including the US and Iran. Volatility is likely to remain quite high. Fundamental circumstances should result in a recovery in crack values. A weaker dollar should contribute to outright price increases. On balance we suspect prices will rise in the week ahead.