Russia’s invasion of Ukraine caused a historic spike in petroleum prices which registered their largest weekly gains in terms of dollars on record. Accentuating the week was the dangerous seizure of Europe’s largest nuclear power plant in the city of Zaporizhzhia by Russian troops. The prospects of an endless incursion with no practical exit strategy may well lead to a suspension of Russian petroleum exports or at the very least a reduction in exports which has already started. In an about-face from their position earlier in the week, spokespersons for the US President now claim they are considering a ban on Russian imports. On the week, WTI gained 26.3%, Brent 25.3%, RBOB 23.3% and ULSD 35%. Total commercial petroleum inventories in the United States fell by 3.9 MB as overall US petroleum stocks remain quite low and the US Strategic Petroleum Reserve remains at a 20+ year low.
Rapid expansion of inflation and pending rate hikes by the Federal Reserve outweighed positive job numbers this week as the Dow lost 7.5%, the S&P 9.2% and the NASDAQ 14.9%. The dollar index increased sharply on the week, rising by 1.97 to close at 98.51. Gold prices also increased sharply, rising by $79 per ounce to settle at $1,966.60 as investors flee to the safety of precious metals.
Prior to the invasion of Ukraine, Russia exported roughly 4.7 MBPD of Crude and 2.8 MBPD of refined products. Data gleaned from shipping reports now indicate Russian exports for Crude are 3.2 MBPD and refined products are now 1.8 MBPD. The practice of self-sanctioning has emerged. Exports from the Black Sea port of Tuapse have been halted. Refinery utilization at the Ryazan refinery in central Russia has been reduced significantly. Exports from the Primorsk terminal in the Baltic Sea have been scheduled for a 15.5% reduction in March which may fall further. Even if willing buyers, primarily in Europe, are found, credit and banking issues are seriously reducing prospects of transaction completion. The practice of self-sanctioning has contributed significantly to European diesel cracks reaching 14-year highs this past week.
The US currently imports 400 KBPD of Russian Crude and refined products. Were the US to ban Russian imports, prices would likely rise further. The US did ban the export of refining technology to both Russia and Belarus this week.
Despite midweek rumors to the contrary, the multi-nation discussions with Iranian representatives in Vienna regarding their nuclear activity failed to produce an agreement that would enable sanctions to be lifted on Iranian Crude exports.
The announcement this week of a 60 MB release of strategic reserves by IEA member countries failed to halt price increases.
US Crude inventories fell for the first week in three, dropping by 2.597 MB. Crude stocks are now 12% below their five-year average and are 73.2 MB below levels of last year at this time. The price of Crude gained $24.09 on the week. Inventories in the three PADDs affected by trans-Atlantic trade fell by 1.931 MB. Significant reductions on the Atlantic coast and in the Midwest offset growth in Crude inventories in PADD 3, the US Gulf Coast, despite a sharp reduction of imports by 1.061 MB. Inventories at the Nymex delivery point of Cushing Oklahoma fell by 972 KB. Inventories at Cushing fell for an eighth consecutive week, are substantially below their five-year average low and are at their lowest levels since 2002. As expected, refinery utilization rates remain flat at 87.7%. We expect utilization rates will remain near unchanged in the week ahead and exports which rose unexpectedly by 1.11 MBPD this week to ease slightly based on shipping data. We believe production will remain unchanged at 11.6 MBPD. As a consequence, we expect Crude inventories to fall in the week ahead by 1.0 to 1.5 MB.
US Gasoline inventories fell for a fourth consecutive week, dropping by 468 KB. Gasoline inventories are 1% below their five-year average and are 2.5 MB below levels of last year at this time. The price of RBOB gained 8167 points on the week. The average price at the pump for a gallon of Gasoline in the United States continued to climb, rising to $3.63 this week. Inventories in the three PADDs affected by trans-Atlantic trade fell by 316 KB. The reduction was most pronounced in PADD 1, the US Atlantic, where stocks fell by 1.368 MB. Inventories in the PADD 1 subsection that encompasses New York Harbor, the Nymex delivery point, fell by 36 KB. This was somewhat unusual as imports experienced their biggest increase since last June, rising by 187 KBPD to a level of 603 KBPD. Shipping data indicates a consistent if not slightly lower flow of Gasoline from northwest Europe to the United States. As a consequence, we expect imports to remain somewhat consistent in the week ahead. Demand continues to rise, increasing by 86 KBPD to a level of 8.743 MBPD. We find this figure surprising given the sharp increases in the average national price at the pump cited above. We expect production and imports to remain similar to this week and further expect demand to ease. We therefore expect Gasoline inventories to be within 500 KB of unchanged in the coming week.
US Distillate inventories fell for a seventh week in a row, dropping by 574 KB. Distillate inventories are now 16% below their five-year average and are 23.9 MB below levels of last year at this time. The price of ULSD gained by 9268 points on the week. Inventories in the three PADDs affected by trans-Atlantic trade fell by 348 KB. The reduction was most significant in PADD 2, the midcontinent, where stocks fell by 1.007 MB, largely due to thermal needs. Inventories in PADD 3, the US Gulf Coast, increased by 1.088 MB as the flow of exports eased from last week’s figure of 960 KBPD to 749 KBPD. National Distillate inventories remain well below their five-year lows. Freight markets in the US Gulf coast have been exceptionally volatile as concerns for disruption of Russian Distillate supplies imply replacement by US supplies. Despite this concern, the flow of exports did ease. Given present circumstances and historical data, we expect Distillate exports to increase substantially next week. We also expect demand to ease from what is currently a 14 year high. We therefore anticipate Distillate stocks will remain within 500 KB of unchanged in the week ahead.
A number of analysts feel significant demand destruction will occur at Crude prices approximating $125. The price of Brent settled at $118. We expect continued historic volatility and feel WTI structure, given fundamental circumstances as well, should provide the best and safest value.