Market Summary

October 11, 2020

Energy prices increased by nearly 10% on the week as Hurricane Delta approached the coast of Louisiana on a course very similar to that of Hurricane Laura less than two months ago. This was the fourth tropical event in Louisiana so far this year. Nearly 92% of Gulf Coast Crude production and nearly 63% of Gulf Coast Natural Gas production was halted as waterborne platforms were evacuated. On the week, WTI gained 9.6%, Brent 9.1%, RBOB 7.1% and ULSD 10.0%. Overall total commercial petroleum inventories in the United States decreased by 2 MB last week. 

Generally positive economic data as well as some optimism in anticipation of a stimulus package enabled equity indexes to rise. On the week, the S&P gained 3.8%, the Dow 3.3% and the NASDAQ 4.6%. The dollar index continued to soften, settling at 93.06. Dollar weakness contributed to the strength of gold which reached a three-week high, gaining 1% on the week to settle at $1,926.20 per ounce. 

Hurricane Delta came ashore late Friday evening near where Hurricane Laura came ashore earlier in the summer. As the storm churned through the US Gulf, 1.69 MBPD of Crude production and 1.68 BCFD of Natural Gas production were shut in for most of the week. In addition to Citgo’s 418 KBPD Lake Charles refinery and Phillips 66’s 260 KBPD Westlake refinery, both still down from Hurricane Laura due to limited power supply, Alon’s 80 KBPD Krotz Springs refinery was idled in advance of Delta’s arrival. The largest refinery in the United States, the Motiva Port Arthur Texas facility, was not in the storm’s path. The Louisiana Offshore Oil Platform (LOOP) was also closed earlier in the week, limiting US Crude export flows. Wind speeds at landfall were recorded between 125 and 130 mph. Rainfall was significant but not considered heavy enough to inflict any long-term damage on refinery assets. At the time of this writing, damages due to wind on refinery assets are still unclear though anticipated to be limited. 

Saudi Arabia is said to be considering canceling OPEC+ production increases scheduled for January. The original agreement resulted in a historic reduction in output of 9.7 MBPD with an increase of 2 MBPD last month and an additional 2 MBPD in January. A lack of demand recovery linked to the ongoing Covid-19 pandemic has resulted in a reassessment of output projections. Though compliance to the agreement in September was only exceeded by 160 KBPD, the addition of what is now 355 KBPD of Libyan production and the realization that Iranian exports, in defiance of sanctions, are 1.5 to 1.8 MBPD weigh heavily on global supplies. Both Libya and Iran are not party to the OPEC+ agreement. 

A Norwegian oil worker’s strike was settled late Friday. This will result in the resumption of 330 KBPD of production recently lost in the North Sea. It is anticipated that flows will be back to normal by week’s end. 

US Crude inventories increased for a first week in four and second in 11, rising by 501 KB. Crude inventories in the United States are 12% above their five-year average and 67.3 MB above levels of last year at this time. The price of WTI gained $3.27 on the week. Inventories in the three PADDs affected by trans-Atlantic trade fell by 1.9 MB. The reduction was most significant in PADD 2, the US mid-continent, where stocks fell by 2.0 MB on the week. This was due in part to a 1.3% increase in refinery utilization. Inventories in Cushing Oklahoma, the Nymex delivery point, increased by 400 KB on the week. Cushing inventories continue to remain near five-month highs. US Crude exports fell for the first week in three, dropping by 853 KBPD, the largest amount since mid-August. With the closure of the LOOP cited earlier, we anticipate export flows from the US to remain low in the near term. Crude imports increased substantially, rising by 610 KBPD yet still remain substantially below their five-year lows. With limited exports and limited imports due to Hurricane Delta as well as a likely small reduction in utilization rates, we anticipate US Crude inventories will be within 500 KB of unchanged in the week ahead. 

US Gasoline inventories fell for an eighth week in nine, dropping by 1.4 MB. Overall Gasoline stocks are now just slightly below their five-year average and 2.1 MB below levels of last year at this time. The price of Gasoline gained 797 points on the week. Inventories in the three PADDs affected by trans-Atlantic trade fell by 1.5 MB. The reduction was most pronounced in PADD 3, the US Gulf Coast, where stocks fell by 3.8 MB. Increases in exports as well as heightened pipelined activity accounted for most of the reduction. Demand recovered substantially on the week, rising by 367 KBPD to a level of 8.896 MBPD. We do not anticipate demand recovery to be sustained in the week ahead. Gasoline imports increased for a second consecutive week, rising by 117 KBPD to a level of 849 KBPD. Imports are now at the upper end of their five-year average range. Shipping data indicates a sustained flow of imports from northwest Europe in the week ahead. This increase in imports in addition to an anticipated reduction in demand should offset in large part any reduction in output. We anticipate Gasoline inventories will rise in the week ahead by 1.0 to 1.5 MB.

US Distillate inventories fell for a third consecutive week and fifth week in six, dropping by 962 KB. US Distillate inventories are now 45 MB above levels of last year at this time and are 23% above their five-year average. The price of ULSD gained 1083 points on the week. Distillate inventories in the three PADDs affected by trans-Atlantic trade fell by 1.2 MB. The reduction was most pronounced in PADD 3, the US Gulf Coast, where stocks fell by 0.9 MB. The flow of exports fell by 268 KBPD to a level of 1.03 MBPD, a figure that is close to its seasonal five-year low. Shipping data indicates export flows as stagnant at best in the week ahead. Overall Distillate production increased by 302 KBPD and overall demand increased by 213 KBPD. With a probable slight reduction in output, consistent demand and unchanged export flows, we expect US Distillate inventories will fall slightly in the coming week, dropping by 0.5 to 1.0 MB.

It remains unclear when production will increase from Hurricane Delta related closures. Increases in production from Norway and Libya in conjunction with surprisingly high exports from Iran are among the reasons the Saudi’s are challenged regarding future production policy, cited on the previous page. We expect outright prices to drift lower as a consequence. We further expect the value of WTI to increase against the value of Brent. The outright direction of the market can shift upward in the near term if a stimulus package is passed by the U.S. Congress.