Market Summary

November 15, 2020
finlon@gfint.com

Petroleum prices surged this week driven by the development of a Covid-19 vaccine that is 90% effective. The vaccine was tested on more than 44,000 trial participants. The rollout date for thevaccine is unclear but likely to be no earlier than mid-2021. Until then, this second wave of the virus
has triggered increasing closures of refineries in the US and elsewhere. In a report this week, theParis-based IEA saw no boost in demand stemming from a vaccine until well into 2021. On the week,WTI gained 8.1%, Brent 8.4%, RBOB 3.8% and ULSD 5.4%. Total commercial petroleum inventoriesin the United States fell by 11.5 MB on the week.

News of the Covid-19 vaccine and emerging hopes for a stimulus package in January propelled equities into record high territory. On the week, the Dow gained 4.1% briefly touching new highs, the S&P gained 2.2% closing at historic highs while the NASDAQ lost 0.6%. The dollar index gained by .49 on the week to close at 92.72. Strength in equities and the dollar led to a 3% loss on the week for gold which settled at $1,886.20 per ounce.

The US government-based EIA stated that 1.7 MBPD of global refinery capacity has been permanently closed while 20 MBPD of capacity remains idle, all largely due to the Covid-19 pandemic. As stated earlier, US Crude and product stocks excluding the Strategic Petroleum Reserve fell by 11.5 MB last week. Such stocks have fallen by 96 MB over the last 16 weeks. Total US petroleum inventories are still 31% above their five-year average, a surplus that can be completely reduced at this pace by the end of February 2021.

A major US investment bank sees overall US petroleum inventories reaching their five-year average by the fourth quarter of 2021.

The Paris-based IEA cut its forecast on reduced consumption for Crude by 400 KBPD to a level of 8.8 MBPD for 2020. They further projected an increase in demand in 2021 by 300 KBPD to a level of 5.3 MBPD.

Libyan production reached 1.215 MBPD this week, near historic highs for that country’s output. Iran, with hopes of limited enforcement of sanctions with a new US administration, appears to have increased output by nearly 300 KBPD in the last two weeks with most new production going to China.

After reaching six-month lows in October of 10.4 MBPD, Chinese Crude imports appear to have increased substantially, largely due to Iranian activity cited above and now stand at 11.2 to 11.3 MBPD based on current shipping data.

Both Libya and Iran are members of OPEC but not party to the OPEC+ agreement which will be reviewed in two weeks. Current compliance to the agreement stands at 100%.

US Crude inventories increased for a third week in nine, rising by 4.277 MB. Crude inventories in the US are now 6% above their five-year average and are 39.7 MB above levels of last year at this time. The price of WTI gained $2.63 on the week. Inventories in the three PADDs affected by trans-Atlantic trade gained by 4.107 MB. The increase was most pronounced in PADD 3, the US Gulf Coast, where inventories increased by a disproportionately large 5.102 MB. The increase is largely attributable to a reduction in refinery utilization of 1% of capacity to 74.5% as well as due to a significant increase in imports of 470 KBPD. Inventories at the Nymex delivery point of Cushing Oklahoma actually fell by 518 KB this week as inventories in PADD 2, the midcontinent which encompasses Cushing, fell by 557 KB. This was only the second week in eight that inventories at Cushing have fallen. In the coming week, we see utilization rates and production levels close to unchanged. We anticipate import flows will ease and exports will increase further by at least 200 KBPD to a level of 3.0 MBPD. As a consequence, we expect Crude inventories in the US to fall next week by 1.5 to 2.0 MB.

US Gasoline inventories fell for a fourth week in six, dropping by 2.309 MB. Gasoline stocks remain at their five- year high and are 6.3 MB above levels of last year at this time. The price of Gasoline gained 342 points on the week. Inventories in the three PADDs affected by trans-Atlantic trade fell by 2.386 MB. The reduction was most pronounced in PADD 3, the US Gulf Coast, where stocks fell by 2.62 MB. The reduction was driven by a sharp increase in demand of 426 KBPD to 8.762 MBPD, a five-week high. Despite national utilization rates falling by 1%, Gasoline production increased by 247 KBPD to a level of 9.319 MBPD. This further reinforces the fact that refiners continue to optimize Gasoline production in an effort to reduce Distillate inventories back to normal levels. Inventories in the PADD 1 subsection that encompasses New York Harbor fell by 702 KB this week. This was largely due to a reduction in Gasoline imports by 180 KBPD to a level of 450 KBPD. Shipping data shows a significant growth in Gasoline imports. We expect import flows to exceed 630 KBPD in the week ahead. We see continued production growth in Gasoline with a substantial reduction in demand from the five-week highs as the second wave of Covid-19 expands. We further see growth in imports as cited above. We therefore believe Gasoline inventories will grow in the week ahead by 2.0 to 2.5 MB.

US Distillate inventories fell for an eighth consecutive week, dropping by a robust 5.355 MB. Distillate inventories are now 32.6 MB above levels of last year at this time and are 15% above their five-year average. The price of ULSD gained 565 points on the week. Inventories in the three PADDs affected by trans-Atlantic trade fell by 4.516 MB. Inventory reduction was most pronounced in PADD 1, the US Atlantic coast, where stocks fell by 2.271 MB as thermal needs covered a large part of that region. As mentioned earlier, Distillate inventories continue to be reduced due to refineries optimizing Gasoline yields. Shipping data indicates an increase in exports primarily from the US Gulf Coast that should reach a level of 1.35 MBPD next week. Lower production, higher imports and a slight reduction in demand should result in a further reduction in Distillate inventories. In the coming week, we expect Distillate stocks to fall by 1.5 to 2.0 MB.

Projections on the timing of broad availability of the Covid-19 vaccine coupled with optimized Gasoline yields have influenced the forward curve of refined products in the front months. While weakness is common in winter Gasoline structure, the severity of deterioration this week was conspicuous. Structure in Distillate in the front three months is now trending lower despite ongoing reductions in inventories for reasons cited above. We expect seasonality and diminished demand linked to Covid-19 to weigh heavily on Gasoline structure and cracks in the near term.