Market Summary

November 29, 2020

Petroleum prices rose for a fourth consecutive week amid continued hopes for a vaccine for the Covid-19 pandemic, expectations that OPEC+ will likely maintain output at current levels for the first quarter of 2021 and signs of a normal transition of presidential administrations in the US. On the week, WTI gained 7.3%, Brent 7.2%, RBOB 9.1% and ULSD 9.7%. Total US petroleum inventories fell by 1.1 MB on the week, despite US refinery utilization rates reaching three-month highs. Prices leveled off at week’s end due to limited volume associated with the US Thanksgiving holiday, a staggering rise in cases and deaths of Covid-19 worldwide and cracks starting to show in the OPEC+ alliance as the UAE questions the benefit of membership and Iraq continues to plead for increased output to address overwhelming budget shortfalls.

Good news on Covid-19 vaccines and signs of a smooth US presidential transition were strongly supportive of US equities. On the week, the DJIA gained 2.2%, crossing the 30,000 threshold for the first time, the S&P gained 2.3%, also reaching record highs, while the NASDAQ gained 3.0%. These gains occurred despite an increase in joblessness in the United States for a second consecutive week. The dollar index continued to weaken, falling by .55 to 91.83. Gold experienced its largest weekly drop in more than two months, losing its luster as a safe haven investment amid positive vaccine news. Gold settled the week at $1,790.70 per ounce.

Though all signs point to a three-month extension of current OPEC+ output levels, concerns exist over the groups practical ability to maintain both output discipline among the participants and some measure of balance in global supplies.

Iraq, the second largest producer in OPEC and party to the OPEC+ agreement, continues to express a need for an increase in output due to severe government budget shortfalls.

Libya, a member of OPEC but not party to the agreement, is now consistently producing 1.3 MBPD.

Venezuela, a member of OPEC but not party to the agreement, has increased its output significantly since the US presidential elections with the view that the new administration will be more lenient with sanctions. A number of vessels have been chartered from Venezuela for China in the last week. Estimates of increases in output range from 500 to 800 KBPD.

Iran, a member of OPEC but not party to the agreement, has increased exports by 300 to 500 KBPD since the US presidential elections, sharing a view with Venezuela that a higher degree of leniency will occur.

A major US investment bank stated that global demand should only reach pre-pandemic levels in mid-2022, with the eventual vaccine rollout expected to begin in mid-2021.

US Crude inventories fell for the first week in three, dropping by 754 KB. Crude inventories in the US remain 6% above their five-year average and are 36.7 MB above levels of last year at this time. The price of WTI gained $3.35 on the week. Inventories in the three PADDs affected by trans-Atlantic trade fell by 27 KB. A gain of 2.021 MB in the Gulf Coast was nearly offset by the reduction in PADD 2 of 1.905 MB. The reduction in PADD 2 was driven by a significant drop in Cushing inventories. Stocks at the Nymex delivery point experienced their largest drop since mid-June, falling by 1.721 MB. The reduction in inventory was keyed in large part by a significant increase in refinery utilization which reached a three-month high and now stands at 78.7% nationally. This was only the third week in 10 that inventories at Cushing fell. Given limited expectations for increases in refined product demand, we expect utilization rates to remain stable in the week ahead. Technically, though the WTI/ Brent spread in the near term appears flat, the premium of Brent versus WTI has widened to the point where exports, which increased by the relatively limited amount of 83 KBPD to a level of 2.8 MBPD, should increase further. With expectations of consistent production and demand and with an increase in exports, we anticipate US Crude inventories will fall by 1.0 to 1.5 MB in the week ahead.

US Gasoline inventories increased, rising by 2.18 MB. Gasoline stocks are now 4% above their five-year average and are 4.1 MB above levels of last year at this time. The price of Gasoline gained 1003 points on the week. Inventories in the three PADDs affected by trans-Atlantic trade gained 1.531 MB. The gain was most pronounced in PADD 1, the US Atlantic, where stocks increased by 1.118 MB. Inventories in the PADD 1 subsection that encompasses New York Harbor, the Nymex delivery point, fell by 150 KB as imports surprisingly fell by 89 KBPD to a level of 441 KBPD. Shipping data indicates import flows should be unchanged in the week ahead. The disproportionately large gain in prompt Gasoline was driven in part by a perceived supply shortfall in New York Harbor specific to December Gasoline which expires on Monday. Despite this regional and time specific shortfall of supply, national demand figures for Gasoline continue to be terribly depressed due to Covid-19. Demand for Gasoline in the United States fell again this week by 129 KBPD to a level of 8.12 MBPD, a figure well below five- year lows. Gasoline demand in the US is down 12% from last year at this time. In the coming week, with likely weaker demand, flat production and unchanged import flows, we expect Gasoline inventories to increase by 1.5 to 2.0 MB.

US Distillate inventories fell for a tenth consecutive week, dropping by 1.441 MB. Distillate inventories are now 26.2 MB above levels of last year at this time and are 8% over their five-year average. The price of ULSD gained 946 points on the week. Inventories in the three PADDs affected by trans-Atlantic trade fell by 1.681 MB. The reduction was most pronounced in PADD 1 where stocks fell by 2.092 MB. This reduction was due to both commercial delivery activity and an increase in thermal needs. We were surprised that the flow of Distillate exports from the US fell by 255 KBPD to a level of 800 KBPD. Despite this, we expect exports to recover next week to a level of 1.05 MBPD. US Distillate inventories have fallen by more than 37 MB since early September highs. Given expectations of consistent refinery behavior through the balance of the winter, we expect Distillate stocks to fall below levels of last year at this time by the end of the year. Likely flat utilization rates, reasonable commercial and thermal demand as well as a slight increase in exports should result in a further reduction in Distillate inventories of 2.0 to 2.5 MB.

With the recent rise in utilization rates. the risk to crack values grows. This could limit the rate of price advances we have seen over the last two weeks. The relative value of ULSD should resume its increase against that of Gasoline. We expect this to persist, for the most part, until spring refinery maintenance season. ULSD should resume its place as the best relative value in the complex. Though much has been made of a rise in Asian Crude demand, increasing output from Libya, Iran and Venezuela should temper further outright price increases. It appears possible that the price increase of more than 26% since the first announcements of Covid-19 vaccines may be nearing their limit.