Market Summary: February 6, 2022

Petroleum prices rose for a seventh consecutive week,reaching seven year highs as the price of WTI breached $93. There were a number of influences, virtually all positive, that drove petroleum prices higher. A 30 year high in weather-related demand reducing US Distillate inventories to 8 year lows, numerous supply outages among OPEC+ participants that have rendered targeted output gains roughly 1 MBPD below their objectives, increasing geopolitical risk as more Russian troops amass near the Ukrainian border, Iranian nuclear discussions that have effectively ceased, ongoing drone strikes in the UAE by Iranian-backed Houthi rebels and a severe cold snap in Texas that should have significant impact on production in the Permian basin all contributed to price increases. On the week, WTI gained 6.3%, Brent 5.4%, RBOB 5.5% and ULSD 6% as total commercial petroleum inventories in the US fell by 5.8 MB.

Volatile conditions amid an alarmingly high rate of inflation and shifts in expectations on economic growth and interest rates propelled equity indexes lower. On the week, the Dow lost 3.4%, the S&P 5.6% and the NASDAQ 9.9%. The dollar index fell sharply, dropping by 1.79 to end the week at 95.48. Conversely, gold prices increased, rising by $22.20 per ounce this week to end trading at $1,808.80.

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Statistics evincing the severity of the shortfall of Distillate supplies in the US and elsewhere are numerous and overwhelming, specifically:

  • US Distillate demand is now 5% above pre-pandemic levels;
  • US Distillate stocks are 19% below their five-year average;
  • US Distillate refinery margins are at 14 year highs;
  • Distillate inventories in PADD 1, the US Atlantic, are at their lowest levels since April 2020;
  • US Distillate exports are 0.527 MB, well below five-year average lows;
  • In Europe, record high Natural Gas prices have led to the steepest backwardation in Distillate since March 2008. This feature continues to keep pressure for increasing US exports to Europe;
  • The Distillate crack in northwest Europe is at its highest level since October 2019;
  • European Distillate inventories are now well below their five-year average lows

In what was their briefest virtual meeting on record, slightly less than 16 minutes, participants in the OPEC+
pact agreed to another 400 KBPD increase in the month of March. Significant production shortfalls in Iraq,
Libya, Nigeria, which featured a spectacular and deadly fire sinking a tanker this week off the coast of the
Warri loading installation, and Ecuador among others have now rendered OPEC+ output at nearly 1 MBPD
below targeted flows. These issues, coupled with the emerging knowledge that the vast majority of global
spare production capacity is controlled by three countries, specifically Kuwait, the UAE and Saudi Arabia,
continue to accentuate global supply limitations which should persist for quite an extended period of time.

US Crude inventories fell for the first week in three, dropping by 1.047 MB. Crude stocks are now 9% below their
five-year average and are 60.6 MB below levels of last year at this time. National Crude inventories now stand at
five year lows. The price of WTI gained $5.49 on the week. Inventories in the three PADDs affected by transAtlantic trade fell by 2.245 MB. Inventories fell by a disproportionately large amount in PADD 3, the US Gulf Coast,
where stocks fell by 2.7 MB. This reduction was due in large part to severe cold which was responsible for shutting
in a number of production installations in the Permian basin. The shut-in contributed to a further reduction in
national utilization rates which fell by one full percent to 86.7% of rated capacity. Inventories at the Nymex
delivery point of Cushing Oklahoma fell for a fourth consecutive week. Inventories at Cushing have fallen by more
than 18% in the last month and are now well below their five-year average lows. Overall US inventories were
reduced despite a drop in Crude exports of 420 KBPD to a level of 2.376 MBPD. Shipping data indicates a continued
limited flow of Crude from the US. Expectations of lower refinery utilization, further reductions in domestic
production which should reduce inventories at Cushing should result in Crude inventories being within 500 KB of
unchanged in the coming week.

US Gasoline inventories increased for a fifth consecutive week, rising by 2.119 MB. Gasoline inventories are now
2% below their five-year average and are 2.2 MB below levels of last year at this time. US Gasoline stocks are at
their highest levels in nearly one year. The price of Gasoline gained 1362 points on the week. The average price at
the pump now stands at $3.423 per gallon in the US, its highest level since September 2014. Gasoline inventories
in the three PADDs affected by trans-Atlantic trade gained by 1.797 MB. The increase was most pronounced in
PADD 1, the US Atlantic, where stocks increased by 1.378 MB. Though demand fell by 279 KBPD to a level of 8.226
MBPD, production fell by nearly as much, dropping by 267 KBPD. Inventories in the PADD 1 subsection that
encompasses New York Harbor, the Nymex delivery point, actually fell by 232 KB. This is most curious as imports
increased by 119 KBPD to a level of 433 KBPD. The steady flow of Gasoline imports was the key factor in growth
of national Gasoline stocks on the week. A further but small reduction in Gasoline production, static imports based
on current shipping data and demand reduced by severe weather conditions in highly populated areas should
enable national Gasoline inventories to increase in the week ahead by 2.5 to 3.0 MB.

US Distillate inventories fell for a third consecutive week, dropping by 2.41 MB. Distillate inventories are now 19%
below their five-year average and are 40.1 MB below levels of last year at this time. The price of ULSD gained 896
points on the week. Distillate markets continue to remain firm in every major global hub. Inventories in the three
PADDs affected by trans-Atlantic trade fell by 2.901 MB. The reduction was most conspicuous in PADD 3, the US
Gulf Coast, where stocks fell by 1.961 MB. Sharp increases in thermal demand facilitated the reduction as Distillate
exports actually fell to 527 KBPD, a figure that is well below its five-year low. Demand continued to outpace
domestic production by 67 KBPD, a figure that is expected to widen significantly in the week ahead. Despite sharp
increases in both Distillate structure and cracks this past week, the relative value of Distillate is still expected to
be the strongest in the petroleum complex for the near term. An expected reduction in production, a sharp
increase in demand related to this week’s two major winter storms and consistent exports should result in a
reduction in Distillate inventories of 2.5 to 3.0 MB in the coming week.

Overwhelming fundamental and geopolitical circumstances coupled with a weakening dollar could propel outright
prices and structure in Crudes and Distillates higher.

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