Market Summary

December 20, 2020
finlon@gfint.com

Continued optimism over distribution of Covid-19 vaccines overshadowed an alarming increase in Covid-19 infections, driving energy prices up for a seventh consecutive week to their highest levels since February. This is the longest streak of weekly gains in 20 months. Prices have increased by nearly 40% since the third week of October. Continued dollar weakness linked to a likely accommodative Fed policy as well as a stimulus package from the US Congress, which is still plausible, that will dramatically dilute the dollar supply also bolstered energy prices. Overall total commercial petroleum inventories in the United States fell by 6.2 MB. On the week, WTI gained 5.4%, Brent 4.6%, RBOB 6.7% and ULSD 5.3%.

All major equity indexes in the United States hit historic highs this week despite poor employment numbers and soft retail sales. On the week, the Dow gained 0.4%, the S&P 1.3% and the NASDAQ 3.1%. The dollar index fell to its lowest level since April 2018, settling the week at 89.84. As expected with a weak dollar, gold prices rose substantially, increasing by more than $40 per ounce to settle at $1,886.80.

A second Covid-19 vaccine produced by Moderna joins the Pfizer BioNTech vaccine as cleared by the US FDA advisory panel. The Moderna vaccine will likely be approved for emergency use early in the coming week.

OPEC issued its monthly report this week which anticipates a slower demand recovery from the coronavirus. The report projects demand down 350 KBPD for 2021 from last month’s report. The Paris-based IEA issued its monthly report citing a further reduction in demand of 170 KBPD for 2021.

Libya, a member of OPEC not party to the current OPEC+ agreement, has an objective of raising production by about 500 KBPD to a level of 1.7 MBPD in the near future. Libya added an additional 100 KBPD of production this week which now exceeds 1.3 MBPD.

Iranian leadership stated unequivocally that it will not seek approval for export increases which they anticipate will occur in the near future. Iran, stung by ongoing sanctions largely at the hand of the United States, expects greater ease in achieving exports with the incoming, left-leaning US administration. Though difficult to accurately assess, current Iranian output approximates 500 to 600 KBPD. Iranian leadership has instructed its oil sector to increase production as soon as possible to a level of 2.3 MBPD.

OPEC+, without the participation of Libya, Iran and Venezuela, is still on track to increase output by 500 KBPD in the month of January.

US Crude inventories decreased for the second week in four, falling by 3.135 MB. US Crude inventories are now 10.5% above their five-year average and are 53.3 MB above levels of last year at this time. The price of WTI gained $2.52 on the week. Inventories in the three PADDs affected by trans-Atlantic trade fell by 2.391 MB. The loss was most pronounced in PADD 3, the US Gulf Coast, where stocks fell by 2.970 MB. A strong rebound in export flows of 793 KBPD from what were two-year lows last week was the primary driver in reducing inventories. Inventories at the Nymex delivery point of Cushing Oklahoma gained for the first week in four, rising by 198 KB. This was most unusual to see an increase in Cushing stocks and exports simultaneously. Shipping data indicates a continued flow of exports in the coming week. This export flow, likely unchanged utilization rates and consistent production at or near 11 MBPD should lead to a further reduction in Crude inventories in the week ahead. We expect Crude stocks to draw by 2.0 to 2.5 MB.

US Gasoline inventories rose for a fifth consecutive week, rising by 1.02 MB. Gasoline stocks remain 5% over their five-year average and are now 8.4 MB above levels of last year at this time. The price of Gasoline increased by 885 points on the week. Inventories in the three PADDs affected by trans-Atlantic trade gained by 944 KB. The increase was most conspicuous in PADD 1, the US Atlantic, where stocks increased by 655 KB. Inventories in the PADD 1 subsection that encompasses New York Harbor gained by 1.514 MB. This was most unusual as the flow of imports fell substantially, dropping by 178 KBPD to a level of 611 KBPD, the first drop in three weeks for Gasoline imports and the largest single week decline since August. Shipping data indicates a substantially lower flow of imports in the week ahead. We anticipate imports to drop by nearly 200 KBPD next week. With refinery utilization anticipated as unchanged and with demand likely to remain soft, we expect Gasoline inventories to fall next week by 0.5 to 1.0 MB.

US Distillate inventories increased for a third consecutive week, rising by 167 KB. Distillate inventories are now 26.2 MB above levels of last year at this time and remain 11% above their five-year average. The price of ULSD gained by 762 points on the week. Inventories in the three PADDs affected by trans-Atlantic trade fell by 154 KB. The decline was most pronounced in PADD 2, the midcontinent, where stocks fell by 704 KB. The reduction in PADD 2 was largely linked to thermal needs as cold fronts enveloped the central part of the United States. Overall demand for Distillate increased by a substantial 613 KBPD to a level of 4.002 MB. This level of demand is almost on a par with non-Covid levels for this time of year. The flow of exports from the US to Latin America and elsewhere increased dramatically this week. We count more than 50 ships having been chartered for Distillate exports from the US. Exports had risen by 255 KBPD to a level of 1.1 MBPD for this week. This figure is likely to rise quite substantially in the next week and will probably be a key feature of the EIA statistical release on Wednesday. For this specific reason, we expect Distillate inventories in the United States to fall by 2.0 to 2.5 MB in the coming week.

A weakened dollar is likely to support outright price values in petroleum. There is some evidence of a top being approached as structure in the front months of Crude is no longer rising. Until such a top is reached, increases in crack values and refined product structure should continue unabated.