Market Summary

November 22, 2020
finlon@gfint.com

Petroleum prices increased for a third consecutive week as trials for Covid-19 vaccinations continue to show signs of success. Prices were further supported by the likelihood that the upcoming OPEC+ meeting will result in no further increase in global Crude supplies. The alarming, continuing surge in Covid-19 cases worldwide is enabling demand destruction to persist, particularly in Gasoline inventories, as the trend of Distillate inventory reduction and Gasoline inventory growth remains. The forward curve in refined products continues to indicate demand recovery late in the second quarter of 2021. On the week, WTI gained 5.7%, Brent 4.2%, RBOB 5% and ULSD 6.7%. Total commercial petroleum inventories in the United States fell by 10.2 MB this week.

With no further vaccine breakthroughs and no concession by the incumbent president, equities drifted near unchanged. On the week, the DJIA lost 0.7%, the S&P 0.8% and the NASDAQ 0.2%. The dollar index fell slightly, dropping by .34 to settle at 92.38. Gold prices also softened by more than $15 to settle at $1,870.80 per ounce.

Participants in the OPEC+ agreement are scheduled to convene both in person and virtually in Vienna from 30 November through 1 December. It is now clearly anticipated that no change will occur in current output levels. Libyan output, currently at 1.215 MBPD, is expected to expand to 1.3 MBPD by month’s end according to NOC officials. Both Libya and Iran are not party to the OPEC+ agreement.

Despite increases in Libyan output, Brent contango has narrowed, largely due to sharp growth in Chinese Crude storage which is enabling a rise in the flow of Crude from west to east.

Though the US death toll from the Covid-19 virus now exceeds 250,000, online shopping driven by the pandemic is sustaining Distillate demand. In the last month, interstate truck traffic has risen by more than 3% in each of the last three weeks. US Distillate demand is now 4.225 MBPD, a strong figure for this time of year even in non-Covid circumstances.

The Paris-based IEA reiterated that there will be no vaccine driven change in demand in the first half of 2021.

US Crude inventories grew for the fourth week in nine, rising by 769 KB. Crude inventories in the US remain 6% above their five-year average and are 39.1 MB above levels of last year at this time. The price of WTI gained $2.05 on the week. Inventories in the three PADDs affected by trans-Atlantic trade increased by 4.687 MB. The increase was again most pronounced in PADD 3, the US Gulf Coast, where inventories rose by 2.305 MB. This was largely driven by a sharp increase in domestic production which grew by 400 KBPD to a level of 10.9 MBPD. This enabled inventories to grow despite the significant increase in refinery utilization of 3% to 77.4%. Stocks at the Nymex delivery point of Cushing Oklahoma increased substantially, rising by 1.2 MB, the largest weekly gain since October. Inventories at Cushing are now at their highest levels since May and stand at more than 81% of capacity. This was the seventh week in nine that inventories at Cushing grew. With no dramatic change anticipated in either import or export flows and with utilization rates likely near unchanged in the week ahead, we expect Crude inventories to increase slightly. Crude stocks should remain unchanged to possibly increase by 0.5 MB on the week.

US Gasoline inventories increased for the third week in seven, rising by 2.611 MB. Gasoline stocks are now 4% above their five-year average and are 7.2 MB above levels of last year at this time. The price of Gasoline gained 562 points on the week. Inventories in the three PADDs affected by trans-Atlantic trade gained by 2.458 MB. The gain was most pronounced in PADD 3 where stocks increased by 1.14 MB. Inventories in the PADD 1 subsection that encompasses New York Harbor, the Nymex delivery point, increased substantially, rising by 1.495 MB. This was driven in part by an increase in imports of 80 KBPD to a level of 530 KBPD. Shipping data indicates a significant increase in the flow of Gasoline cargoes to the US from Europe in the week ahead. The increase is such that freight rates in the US Gulf Coast may have started to establish a floor after being dormant and depressed for quite some time. Overall Gasoline demand in the United States fell by 504 KBPD to a level of 8.258 MBPD, a figure obviously driven by expansion in Covid-19 cases. The forward curve of Gasoline, traditionally weak from winter to spring, appears more pronounced this year than in years past. We expect the relative value of Gasoline to remain the weakest in the petroleum complex and anticipate further inventory growth. In the week ahead, given expectations for a sharp increase in imports, we expect Gasoline inventories to rise again by 2.0 to 2.5 MB. It merits mentioning that stocks grew this past week in a week that normally sees inventory transfer to secondary storage for an anticipated rise in holiday demand. This year that simply is not the case.

US Distillate inventories fell for a ninth consecutive week, dropping by a substantial 5.216 MB. Distillate inventories are now 28.4 MB above levels of last year at this time and are 11% over their five-year average. The price of ULSD gained 813 points on the week. Inventories in the three PADDs affected by trans-Atlantic trade increased by a disproportionately large 5.251 MB. The reduction was most pronounced in PADD 3, the US Gulf Coast, where stocks fell by 2.142 MB. This was largely facilitated by an increase in chartering activity for exports. We expect the level of exports will increase next week to near 1.4 MBPD. The growth in exports coupled with increasing domestic demand linked to online shopping, as cited on the previous page, should enable Distillate inventories to fall again in the coming week. We anticipate Distillate inventories in the United States will fall by 4.0 to 4.5 MB.

The timing of a practical rollout for the Covid-19 vaccine is well reflected in the forward curves of both Distillateand Gasoline. The difference between the two continues to be further accentuated by heightened Gasolineproduction through the winter that has enabled Distillate inventories to drop dramatically over the last 17 weeksto levels that are rapidly approaching seasonal norms. For this reason, we expect Gasoline to continue to be theweakest relative value in the complex. Ongoing OPEC+ resolution and signs of increased demand in China shouldenable outright prices to remain somewhat firm.