Market Summary: March 20, 2022

Volatility exacerbated by a liquidity crunch that intensified price swings was a key characteristic of petroleum markets which fell for a second consecutive week after having reached 14 month highs. The price of WTI settled below $100 on Tuesday for the first time since late February before recovering slightly. Increasing evidence of limited Russian exports, peace talks that have yielded no results amid increased bombing of civilian targets and underproduction of OPEC+ pact participants were positive influences on the market. A significant resurgence of Covid cases in China threatening petroleum demand of the largest Crude importer in the world, possible increases of production from Iran and Venezuela and the largest drop in open interest on petroleum exchanges in 14 years driven by intensifying volatility weighed on markets. On the week, WTI and Brent fell 4.2% and RBOB 2.2% while ULSD increased by 5.3%. Total commercial petroleum inventories in the United States fell by 3.6 MB last week in a market that is fundamentally tight.

Softening energy prices and the increase in the cost of the dollar as the Federal Reserve finally raised rates with promises of more to come were supportive of equity indexes. On the week, the DJIA gained 5.5%, the S&P 6.2% and the NASDAQ 8.2%. The dollar indexed eased by 0.90, settling the week at 98.23. Gold prices also softened, falling by $63 an ounce to settle at $1,925.30.

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The IEA issued a report on Wednesday stating April exports of Crude and refined products from Russia are expected to be 3 MBPD lower than before the invasion as self-sanctioning continues. One glaring exception to the rule is India with no sanctions against Russia at the moment. Russia currently supplies India 150 KBPD with expectations that Russian imports could increase to 500 KBPD in the near future.

Production capacity among OPEC+ participants has fallen measurably since November. Compliance to quotas for production among participants was 117% in November, 122% in December, 129% in January and 136% in February. The loss of production from Russia, which is a participant to the pact, in the month of March will likely cause compliance to quotas to skyrocket, conceivably rendering the overall pact meaningless. At this time, only Saudi Arabia and the UAE have any measurable spare production capacity.

Discussions among 11 nations and Iran continue in Vienna in an apparent stalemate. Iran’s floating storage and excess production capability could introduce up to 1.3 MBPD into global markets should sanctions be rescinded. There is also limited new information regarding discussions with Venezuela where possible increases in output would be quite limited due to the state of deterioration of their petroleum infrastructure.

US Gasoline inventories fell for a sixth consecutive week, dropping by 3.615 MB. Gasoline inventories are right at their five-year average and are 8.9 MB above levels of last year at this time. The price of RBOB fell by 793 points on the week. The average price at the pump for a gallon of gas in the US fell to $4.262 this week. Inventories in the three PADDs affected by trans-Atlantic trade fell by 2.115 MB. The reduction was again most pronounced in PADD 2, the US midcontinent, where stocks fell by 1.31 MB. Inventories in the PADD 1 subsection that encompasses New York Harbor, the Nymex delivery point, actually increased by 827 KB. This occurred despite a significant reduction in Gasoline imports which fell by 229 KBPD to a level of 531 KBPD. Trans-Atlantic freight has softened slightly in the last week which should result in somewhat unchanged import flows. Overall US demand eased slightly on the week, dropping by 18 KBPD to a level of 8.944 MBPD. This could be a sign of Gasoline demand cresting given high prices but may be an anomaly as demand generally increases during spring holidays. Gasoline inventories throughout the supply chain are now being managed in advance of vapor pressure and organic compound changes which occurs on a wholesale level at the beginning of April and a retail level in the middle of the month. Purges of high vapor stocks are not uncommon. For this reason alone, we anticipate Gasoline inventories to fall by another 2.5 to 3.0 MB.

US Distillate inventories increased for the first week in nine, rising by 332 KB. Distillate inventories are now 16% below their five-year average and are 23.5 MB below levels of last year at this time. The price of ULSD fell by 1805 points on the week. Inventories in the three PADDs affected by trans-Atlantic trade fell by 156 KB due to the significant reduction in PADD 2 of 841 KB due in large part to remnant thermal needs. Despite slightly softer freight this week, the flow of US exports of Distillate increased by 341 KBPD to a level of 1.451 MBPD. Shipping data indicates a persistent flow of Distillate at or near current levels. As expected, Distillate demand fell significantly, dropping by 883 KBPD to a level of 3.704 MBPD. This drop in demand is largely attributable to retail prices that are at or near five dollars per gallon throughout the United States. The drop in demand appears to be a bit too much too soon. We do not anticipate that figure falling further in the near term. With demand as well as production likely stable and with the flow of exports possibly increasing slightly, we expect Distillate inventories will remain within 500 KB of unchanged in the coming week.

Geopolitical circumstances driving volatility to unprecedented levels overshadow the fact that fundamentally global petroleum supplies are exceptionally tight. We believe prices and structure should increase in the week ahead.

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