Market Summary

December 5, 2020
finlon@gfint.com

Petroleum prices rose for a fifth consecutive week, reaching their highest levels since early March. A last-minute OPEC+ meeting compromise to gradually increase output by 500 KBPD each month over the first four months of 2021 was accepted by the market as constructive for prices despite trepidations from a number of analysts. Bearish EIA statistics showing a 6 MB increase in total commercial petroleum inventories in the US also failed to put a damper on prices. The United Kingdom’s approval of a Covid-19 vaccine that will start to be administered next week and a significant deterioration in the value of the US dollar were the key contributing factors to price strength. On the week, WTI gained 1.6%, Brent 2.1%, RBOB 0.2% and ULSD 1.3%.

Progress on a number of Covid-19 vaccines and continued dollar weakness enabled equity indexes to rise. On the week, the DJIA gained 1%, the S&P 1.7% and the NASDAQ 2.1%. The US dollar reached 21⁄2 year lows as hopes have been rising for a compromise stimulus proposal now circulating in the US Congress which, should it succeed, would dramatically increase an already staggering supply of dollars in the economy. The US dollar index fell by more than a point this week, settling at 90.69. Gold prices rose for similar reasons, settling at $1,838.30, an increase of nearly $48 per ounce on the week.

The 23 nations that are party to the OPEC+ pact agreed to a 500 KBPD increase in output on a monthly basis starting in January through the month of April 2021. Exceptional pressure from Russia drove this compromise from what was expected to be a rollover of fourth quarter 2020 production. The agreement does allow for monthly meetings to assess demand and make adjustments as required. Saudi Arabia and Russia, the two largest producers in the group, will each increase production by 126 KBPD. Total OPEC production increases will be 304 KBPD while non-OPEC production increases will total 196 KBPD.

A number of petroleum analysts have expressed concern that the agreement will result in a gradual deterioration of prices as the practical effects of any large scale Covid-19 vaccinations on petroleum demand are still considered by many to be at least six months away.

Libya, Iran and Venezuela, all OPEC members not bound by the agreement, plan on their combined December output to exceed October output by 1.87 MBPD, according to a number of sources both at ministerial levels and in shipping markets.

Despite the efforts of OPEC+ to control output and reduce global inventories, a leading petroleum publication estimates global stocks will be 800 MB higher at the end of 2020 than they were at the end of 2019.

US Crude inventories dropped by 679 KB. Crude inventories in the US are 7% above their five-year average and are 40.9 MB above levels of last year at this time. The price of WTI gained $0.57 on the week. Inventories in the three PADDs affected by trans-Atlantic trade gained by 314 KB. A reduction in PADD 3, the US Gulf Coast, of 652 KB was more than offset by gains in PADDs 1 and 2. Stocks in PADD 2 gained by 608 KB despite a 317 KB reduction in Cushing Oklahoma, the Nymex delivery point, that is encompassed by PADD 2. Stocks at Cushing fell for a second week in a row. This occurred even though the value of WTI deteriorated by another $0.18 versus Brent on the week. This relative weakness in WTI facilitated export growth as flows increased by 625 KBPD to a level of 3.5 MBPD. Given continued limited expectations for improvements in refined product demand, we expect utilization rates to remain at or near their current levels of 78.2% of capacity. This, combined with anticipated flat production, should result in another small drop in US Crude inventories next week. We expect stocks to fall by 0.5 to 1.0 MB in the week ahead.

US Gasoline inventories rose substantially, increasing by 3.491 MB. This was the largest weekly gain in Gasoline supplies since April. Gasoline stocks remain 4% over their five-year average and are 4.2 MB above levels of last year at this time. The price of Gasoline fell by 182 points on the week. Inventories in the three PADDs affected by trans-Atlantic trade increased by 3.685 MB. The gain was again most pronounced in the US Gulf Coast where stocks increased by 2.653 MB. Inventories in the PADD 1 subsection that encompasses New York Harbor, the Nymex delivery point, increased by 1.799 MB. An increase in the flow of imports, as expected, of 81 KBPD to a level of 522 KBPD facilitated such growth. Shipping data indicates a further increase in imports of approximately 60 KBPD next week. The reduction in demand continues to be the key factor in Gasoline inventory growth. Demand this past week was 7.97 MBPD. Demand last year at this time was 9.03 MBPD. With refinery utilization and production likely unchanged, a small increase in imports and demand static at best, we expect Gasoline inventories to increase in the coming week by 2.5 to 3.0 MBPD.

US Distillate inventories increased for the first week in 11, rising by 3.238 MB. This was the largest weekly gain in Distillate stocks since May. Distillate inventories are now 30.6 MB above levels of last year at this time and 8% above their five-year average. The price of ULSD gained 181 points on the week. Inventories in the three PADDs affected by trans-Atlantic trade gained by 2.632 MB. The increase was most pronounced in PADD 3, the US Gulf Coast, where stocks rose by 1.744 MB. Inventories in PADD 1, the US Atlantic, which is more sensitive to thermal needs, fell by 58 KB. Much of the drop in inventories can be attributed to a sharp increase in exports of 124 KBPD. Shipping data indicates further growth in exports next week. The largest factor in inventory growth was a reduction in demand of 386 KBPD to a level of 3.789 MBPD. An increase in thermal needs is likely to lead to demand exceeding 3.9 MBPD in the week ahead. As a consequence, with exports and demand rising and production likely flat, we expect a small reduction in Distillate stocks of 0.5 to 1.0 MB next week.

In the week ahead, we expect the relative value of Gasoline versus Distillate to continue to deteriorate and remain the weakest relative value in the petroleum complex. We believe outright prices will eventually weaken. It is simply too difficult to connect the rollout of the Covid-19 vaccine on a global scale that is still a number of months away to any possible increase in prompt demand. We further believe that should an additional stimulus package be passed in the US Congress, the influence of its passage would be the same as the previous stimulus package which had no appreciable effect on petroleum demand.