Market Summary

September 27, 2020

Petroleum prices fell for a third week in four as fear of a second wave of the Covid-19 virus and its impact on demand, a much stronger dollar, the resumption of exports from Libya and increasing political pressure in Iraq to increase output in defiance of the recent OPEC+agreement were the key factors in driving prices lower. On the week, WTI lost 2.6%, Brent2.9%, RBOB 1.8% and ULSD 2.8%.

Increasing trade tensions with China, poor employment figures and little hope for a new stimulus package from a deadlocked Congress helped drive equities lower. On the week, the Dow lost1.8% and the S&P 0.6%. The NASDAQ actually gained 2.3% on the week. The dollar index rose significantly, settling at 94.64, a weekly gain of 1.8% while briefly touching two-month highs.Dollar strength enabled gold prices to experience their worst week in six months dropping 4.99%to settle at $1,866.30 per ounce.

Libyan export flows increased significantly this week as the Tripoli-based National OilCorporation expects flows to reach 260 KBPD by the end of next week and 550 KBPD at the end of this year. An unusual sense of conciliation between the Benghazi-based rebels and the internationally recognized government in Tripoli has apparently emerged.

Shipping data is starting to show an increase in spot market availabilities of Iraqi Crude as government officials succumb to budget needs. Iraq’s adjusted export quota from the recentOPEC+ meeting of 3.6 MBPD differs from an actual figure approximating 3.9 MBPD.

Shipping data also shows Iranian exports at 1.8 MBPD, 18-month highs. Exports have risen dueto increasingly creative ways of eluding US sanctions, including turning off transponders and doing ship to ship transfers well outside of conventional shipping lanes.

An explosion of growth in Covid-19 cases in India has led to a significant collapse in demand for petroleum. Refinery utilization rates in India dropped by 26.4% from last year and have fallen8.7% alone since July. As a consequence, Crude imports fell by 23.4% versus last year at this time which translates to roughly 3.58 MBPD. After China, India has long represented the second largest increase in growth of petroleum consumption in the recent past.

Recent increases in acquisition of Crude from floating storage by China has resulted in a staggering increase in Chinese Distillate imports which are depressing an already very well supplied market, further affecting limits in Indian refinery utilization.

US Crude inventories decreased for the eighth week in nine and 11th in the last 16, falling by 1.639 MB. Crude inventories in the United States are 13% above their five-year average and are 74.9 MB above levels of last year at this time. The price of WTI lost $1.07 on the week. Inventories in the three PADDs affected by transAtlantic trade fell by 2.665 MB. The reduction was most pronounced in PADD 3, the US Gulf Coast, where stocks fell by 1.618 MB. A weather-related drop in domestic production of 200 KBPD and a somewhat muted increase in imports of only 160 KBPD facilitated inventory reduction in the Gulf. Inventories at the Nymex delivery point of Cushing Oklahoma gained by only 4 KB. The relative value of WTI continues to increase against the value ofBrent which has been further affected by increases in Libyan production this week. The slight reduction in refinery utilization of 1% to a level of 74.8% was likely due to precautions linked to Tropical Storm Beta of last week. We anticipate utilization rates will be unchanged to possibly up by no more than 2% in the coming week.We further anticipate Crude production to recover to 10.9 MBPD. Shipping data indicates a steady flow of imports that should remain at current levels. Export flows should be limited due to the increasing value of WTI versusBrent, as cited above. For these reasons, we expect Crude inventories in the United States to fall in the week ahead by 0.5 to 1.0 MB.

US Gasoline inventories fell for a seventh consecutive week and 10th in 12, dropping by 4.025 MB. OverallGasoline stocks are now at their five-year average and are 2.7 MB below levels of last year at this time. It should be noted that there has been a reduction in US Gasoline inventories of more than 36 MB since late April. The price of RBOB fell by 306 points on the week. Inventories in the three PADDs affected by trans-Atlantic trade fell by 4.56 MB. The reduction was most pronounced in PADD 1, the US Atlantic coast, where stocks fell by2.787 MB. Stocks in the PADD 1 subsection that encompasses New York Harbor, the Nymex delivery point, fell by 184 KB. This drop was facilitated by a reduction in imports of 126 KBPD to a level of 474 KBPD, a figure that should increase despite much lower freight rates. We expect a slight drop in demand from the current figure of8.515 MB in the week ahead. We further anticipate Gasoline production to be static. A slight increase in imports to a level of 540 KBPD appears possible. The combination of these factors leads us to believe that Gasoline inventories will be within 500 KB of unchanged in the coming week.

US Distillate inventories fell for a third week in four and eighth in 15, dropping by 3.364 MB. US Distillate stocks are now 42.2 MB above levels of last year at this time and are 21% over their five-year average. The price ofULSD fell by 368 points on the week. Distillate inventories in the three PADDs affected by trans-Atlantic trade fell by 2.819 MB. The reduction was most pronounced in PADD 1, the US Atlantic, where stocks fell by 1.612MB. Inventories in PADD 3, the US Gulf Coast, fell by only 6 KB due in large part to the effects of Tropical StormBeta. As expected, Distillate demand increased substantially this week, rising by 1.15 MBPD to a level of 3.959MBPD. Last week’s demand figure appeared unusually low while the current figure appears unusually high. We expect demand to reach seasonal norms with a proportionate Covid-19 adjustment of approximately 3.4 MBPD.Shipping data indicates somewhat stagnant export flows in the week ahead. This should result in a further reduction in Distillate inventories next week of 1.0 to 1.5 MB.

Signs of increasing production from Libya, Iran and Iraq, coupled with a disproportionately large reduction inIndian demand as cited above, should result in a disproportionate oversupply of European Crude versus the US.As a consequence, we believe the value of WTI will continue to increase against Brent. The current state of inventories of refined products should enable Distillate to remain the weakest relative value in the petroleum complex.