Market Summary March 13, 2022

Profound volatility was the primary feature of petroleum markets which had their first weekly loss since Russia’s invasion of Ukraine. Prices fell sharply after reaching historic highs on Monday. The drop was initially triggered by comments, later redacted, by the UAE ambassador to the US that production should be boosted. Increasing concerns of demand destruction and news of a 30 MB release from the US Strategic Petroleum Reserve in April and May in concert with an overall 60 MB release from IEA reserves added to the severe reduction in prices mid-week. The ban of Russian petroleum imports to the US failed to stir prices upward as such imports are 400 KBPD which will be absorbed elsewhere and replaced with limited issue. On the week, WTI fell 5.5%, Brent 4.6%, RBOB 7% and ULSD 10.4%. Total commercial petroleum inventories in the US fell by 8.1 MB, have fallen in 63 of the last 88 weeks, also have dropped by 315 MB since mid- 2020 and are now at seven-year lows.

Incredible inflationary pressure which reached an annualized rate of 7.9%, a 40 year high, has resulted in the near certainty that the Federal Reserve will raise the cost of the dollar in the week ahead. These issues led to a drop in equity indexes. On the week, the Dow lost 2.0%, the S&P 2.9% and the NASDAQ 3.5%. The dollar index increased 0.61 to settle at 99.13. Gold rose on the week by $25.70 per ounce to settle at $1,992.30.

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Since Russia’s invasion of Ukraine amid self-imposed sanctions from a number of countries, Russian petroleum exports have fallen by approximately 2.5 MBPD based on current shipping data. The reduction in Crude exports is roughly 1.5 MBPD and refined products 1.0 MBPD.

OPEC+ production in February was 480 KBPD higher than January in a small sign that long standing production problems among participants to the pact have eased.

Talks appear to have reached another impasse in Vienna among the 11 nations engaged in negotiations with Iran regarding their nuclear program. There was hope in the last two weeks that an agreement was near but last-minute regression on what were originally believed to be minor details has led to another stall in discussions.

Talks were held this week with US and Venezuelan representatives to determine if Venezuelan production could increase with a further easing of sanctions.

Talks were held this week with US and Venezuelan representatives to determine if Venezuelan production could increase with a further easing of sanctions.

Open interest on both energy exchanges has fallen to a six year low amid unprecedented volatility.

US Crude inventories fell for a second consecutive week, dropping by 1.863 MB. Crude stocks are now 13% below their five-year average and are 86.8 MB below levels of last year at this time. The price of Crude fell by $6.35 on the week. Inventories in the three PADDs affected by trans-Atlantic trade fell by 1.728 MB. Significant reductions occurred within the US Gulf Coast where stocks fell by 1.164 MB. This is largely attributable to an increase in refinery utilization rates which rose by 2% nationally to reach a level of 89.3% of capacity. Inventories in Cushing Oklahoma, the Nymex delivery point, fell for a ninth consecutive week, dropping by 585 KB to 22.21 MB. Cushing Crude inventories are now at their lowest levels since September 2018. The total US rig count rose to 663 this week, a figure that is 261 rigs higher than last year at this time. US exports fell significantly, dropping by 1.374 MBPD to a level of 2.422 MBPD. This drop in exports coupled with an increase in imports of 552 KBPD was not enough for overall Crude inventories in the US to increase. We consider this to be a very bullish sign. We therefore believe that Crude inventories in the week ahead are likely to fall by 2.0 to 2.5 MB.

US Gasoline inventories fell for a fifth consecutive week, dropping by 1.405 MB. Gasoline inventories are now 1% above their five-year average and are 13 MB above levels of last year at this time. The price of RBOB fell by 2319 points on the week. The average price at the pump for a gallon of Gasoline in the US has climbed to a record high $4.31. Inventories in the three PADDs affected by trans-Atlantic trade fell by 1.487 MB. The reduction was most pronounced in PADD 2, the US midcontinent, where stocks fell by 1.469 MB. Inventories in the PADD 1 subsection that encompasses New York Harbor gained 951 KB on the week. This increase was directly due to a significant increase in imports of 157 KBPD to a level of 760 KBPD, well above five-year highs. Refinery utilization rates in Europe are increasing due to reduced Russian product imports which are bolstering Gasoline supplies well in excess of their own needs. Shipping data indicates a consistent flow of Gasoline in the week ahead. Demand for Gasoline increased by 219 KBPD this week to a level of 8.962 MBPD. It appears likely that this figure may well represent a near-term peak in Gasoline demand as historically high prices at the pump should cap demand. Higher production, higher imports and capped demand should result in Gasoline inventories being within 500 KB of unchanged in the coming week.

Russia at war, exceptionally low US inventories and prices that have not yet reached levels many analysts believe will cause demand destruction lead us to believe that prices and structure will increase.

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