Energy Market Summary: March 27, 2022

Petroleum prices rose for the first week in three amid persistent volatility and ongoing reduction in open interest. A missile attack on a Saudi Arabian oil installation by Iranian-backed Houthi rebels, global commercial oil stockpiles reaching their lowest level since 2014 and US Distillate inventories falling to eight year lows were key elements supporting prices. Iranian plans to increase production regardless of the state of negotiations with 11 nations regarding their nuclear ambitions, a further reduction in the US Strategic Petroleum Reserve, the EU’s refusal to place an embargo on Russian exports and increasingly strong evidence of demand destruction in both the US and Europe linked to higher prices were key elements weighing on the market. Total commercial petroleum inventories in the US fell by 6.7 MB. On the week, WTI rose 10.5%, Brent 12%, RBOB 7.1% and ULSD 14%.

Rampant inflation and a likely further increase in interest rates in the near term overshadowed some positive employment numbers leading to a reduction in equity indexes. On the week, the Dow fell 4.1%, the S&P 4.7% and the NASDAQ 9.4%. The dollar index increased by 0.59 to settle at 98.81. Gold prices increased by $28.90 per ounce to settle at $1,954.20.

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Lockdowns linked to a resurgence in the Covid virus, a relatively stagnating economy and sharp increases in prices have resulted in a reduction in Chinese petroleum demand according to both a major US investment bank and a major international news outlet.

A major US investment bank presented research this past week indicating a slight supply deficit in global petroleum stocks through the second quarter and an eventual global surplus in the third and fourth quarters of 2022.

In the US, Gasoline demand fell by 307 KBPD. This is most unusual as spring break travel in the past week normally results in a measurable uptick in demand. This was the second consecutive week of reduced Gasoline demand.

The Caspian Sea pipeline consortium resumed loading after an interruption earlier in the week due to severe weather. There were concerns of delays of up to eight weeks in the initial assessment of the damage. Once major oil companies participating in the consortium requested access to the facilities and were denied, revisions on the pipeline output occurred resulting in a much sooner resumption of operations. It is anticipated that the pipeline will be fully operative by week’s end.

The US administration released an additional 4.2 MB of Crude from the Strategic Petroleum Reserve. Inventories in the reserve now stand at 571.3 MB, a 24 year low.

US Crude inventories fell for a third week in four, dropping by 2.508 MB. Crude stocks are now 13% below their five-year average and are 89.3 MB below levels of last year at this time. The price of Crude gained $9.20 on the week. Inventories in the three PADDs affected by trans-Atlantic trade fell by 4.972 MB. The reduction was disproportionately large in PADD 3, the US Gulf Coast, where stocks fell by 2.652 MB. This reduction led to a sharp increase in US Crude exports which rose by 908 KBPD to a level of 3.844 MBPD, their highest level since June 2021. Rising US Crude exports are serving to replace losses of Russian exports associated with self-sanctioning. An increase in refinery utilization for a fifth consecutive week to 91.1% of capacity further aided the reduction in Crude stocks. Crude inventories in Cushing Oklahoma, the Nymex delivery point, increased for the second week in a row, rising by 1.235 MB. Despite this increase, stocks in Cushing remain near 18 year lows. Shipping data indicates a continued high flow of Crude exports. It is unlikely that utilization rates will drop next week. We therefore anticipate Crude inventories in the US will fall in the week ahead by 2.5 to 3.0 MB.

US Gasoline inventories fell for a seventh consecutive week, dropping by 2.948 MB. Gasoline inventories are right at their five-year average and are 5.7 MB above levels of last year at this time. The price of RBOB gained by 2312 points on the week. The average price at the pump for a gallon of Gasoline in the United States is $4.243. The average price for a gallon of Gasoline in Los Angeles is $6.03. Inventories in the three PADDs affected by trans-Atlantic trade fell by 3.601 MB. The reduction was most conspicuous in PADD 1, the US Atlantic, where stocks fell by 3.446 MB. Inventories in the PADD 1 subsection that encompasses New York Harbor, the Nymex delivery point, fell by 1.579 MB. This reduction was somewhat conspicuous as the flow of imports which normally impacts the US East Coast increased by 190 KBPD to a level of 721 KBPD. Imports are now very close to their five-year average flow. Shipping data indicates a consistent flow of imports in the week ahead. Purges of high vapor Gasoline are expected to continue in the week ahead. As stated previously, there are emerging concerns regarding demand which is clearly occurring in an atmosphere of very strong retail prices. We expect inventories to continue to be reduced with the pending vapor pressure change. We believe Gasoline inventories will again fall by 2.5 to 3.0 MB in the coming week.

US Distillate inventories fell for a ninth week in 10, dropping by 2.071 MB. Distillate inventories are now 17% below their five-year average and are 29.5 MB below levels of last year at this time. The price of ULSD gained 5165 points on the week. Inventories in the three PADDs affected by trans-Atlantic trade fell by 2.532 MB due to a significant reduction in inventories in PADD 1, the Atlantic coast, where stocks fell by 3.044 MB. We found the increase in demand of 812 KBPD to a level of 4.516 MBPD quite surprising and would anticipate a significant correction downward in the coming week. Exports fell by 484 KBPD to a level of 931 KBPD, the first week in three that exports have dropped. With a significant reduction in demand anticipated, coupled with the likely increase in refinery utilization rates, we anticipate Distillate inventories will grow in the week ahead by 0.5 to 1.0 MB.

We are starting to get the impression that the Russian Ukrainian war will grind on for some time. Given the key news stories of the past week, we expect more bearish news than bullish news. We suspect outright prices may ease in the week ahead due to the clear emergence of price related demand destruction.

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