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Crude Oil: Ain't No Stopping Us Now

Updated: Jun 8, 2021

Author: Brynne Kelly 6/04/2021

Upbeat U.S. PMI figures reinforced crude oil prices this week with robust manufacturing performance for the month of May. Both ISM and IHS Markit data estimates were exceeded, further illustrating the sectors strength.

Last week, Saudi Arabia raised its official selling price for most grades of its crude oil into Asia for July. As a result, Saudi Aramco increased the OSP for Arab Light into Asia by US $0.20/bbl to US $1.90/bbl, which is the highest OSP for Arab Light since March 2020 and is also above what the market was generally expecting. This increase comes even though Saudi Arabia is set to increase output in July by almost 550k bbls/day from June production levels. The Saudis also increased their OSP's (Official Selling Price) for all grades into Europe and the Med, whilst leaving levels unchanged for the US. Russian producers are making it clear that output should continue to increase in the months ahead, as Russia proved in the past that it is relatively more reluctant to hold supply from the market. Given that Brent is now trading above US $70.00/bbl, the pressure to increase supply will likely only grow.

Although the Organization of the Petroleum Exporting Countries (OPEC) concluded that they will slowly reduce restrictions on production cuts going forward, price action continues to soar. All eyes will be on Iran around the much anticipated nuclear deal negotiations, which will likely see a significant impact on the crude oil market as talks are underway in Vienna.

Regarding Venezuelan crude oil production, there is a rush to ship as much Venezuelan heavy crude to China as possible before a new fuel tax kicks in, causing a 40-50-percent rise in prices, Reuters reports, citing industry insiders and shipping data. New fuel taxes that kick in on June 12, however, will increase the cost of bitumen blend to importers by 40% to 50%, making it uneconomic and choking off flows. "While not all of the 350,000 to 400,000 bpd of the additional bitumen flowing into China will disappear overnight, a large proportion of it will be at risk," an Energy Aspects analyst told Reuters. U.S. sanctions have reduced Venezuelan oil output to some half a million barrels daily over the two years since they were introduced. Even though the Biden administration has extended a sanction waiver for several U.S. oil companies, including Chevron and Halliburton, PDVSA is struggling to maintain production.

Next week is a fairly busy week for data releases. The EIA will be releasing its Short Term Energy Outlook on Tuesday, which will include US production forecasts. This will be followed by OPEC's monthly market report on Thursday and the IEA's monthly oil market report.

Against this backdrop of supportive data, the crude oil complex soared to multi-year highs by the end of last week. In fact, since the beginning of the year, crude oil prices have risen over $20/bbl (left chart, green line vs yellow line). In addition, monthly spread backwardation has also increased by more than $ 0.60/bbl since the beginning of the year (right chart, green line vs yellow line).

The market continues to toy with upside resistance, with calendar spreads meeting resistance on every outright price rally. At this point, we may have lost sight of who is leading who here. Calendar spreads seem to dig their heels in more when outright prices rally, unwilling to break out. The result is that, at these price levels, the entire complex seems to rise and fall together with no particular leader. This means that the market will be heavily influenced by the realization of spot market relationships (i.e. the realization of backwardation).

Speaking of 'realizing backwardation', another key dynamic underlying the move higher in prices has been the inability of the front-month calendar spread to sustain backwardation into expiration. We waited all year for the front calendar spread in WTI to expire in backwardation and this finally happened - in the 11th hour - with the expiration of the Jun-21/July-21 calendar spread (dark green line below).

It's this simple act (backwardation into expiration) that came to the rescue of oil markets last week and lent support to the entire curve.

However, next week ushers in the brunt of the fund roll out of the July, 2021 contract into the August, 2021 contract. Prior to the June contract expiration, the front month spread has been unable to withstand the force of the fund roll and slipped into contango as a result. It will be important for spreads to stand-up to the roll pressure next week if market strength is to be trusted going forward.

The largest beneficiary of the WTI pre-roll so far has been the September, 2021 contract (hot pink line above). This is evidenced by the shape of one-month calendar spreads as seen below. Backwardation reaches it's peak in the Sep-21/Oct-21 and Oct-21/Nov-21 time frame (orange arrow below).

Twelve Month Backwardation

As expected, year-on-year calendar spreads are also bumping up against multi-year resistance above the $5.00 level. The market is in clear need of the next catalyst to push beyond this level.

One place to look for this catalyst is in US gasoline markets.


U.S. imports of gasoline and blending components typically rise in the summer months. A mere five months into 2021 and these imports are already a key feature of the closely watched weekly Energy Information Administration data.

Arrivals of foreign gasoline and components topped 1 million b/d six times so far in 2021, with the most recent weekly data seeing gasoline and component imports step back to 933,000 b/d. For perspective, it took all of 2019 for that import category to top the million-barrel mark as many times. The last time U.S. energy data showed more than six 1-million-b/d weeks of such imports was a decade ago in 2011.

The robust import rate can be attributed to multiple factors. Several significant supply events have forced East Coast markets -- where a high percentage of gasoline imports land -- to rely on outside product more than usual because of the rationalization of refining capacity in PADD 1. As a result, we are seeing much more upside pressure on US New York Harbor gasoline cracks spreads (vs Brent) relative to European gasoline cracks (purple line vs gold line below).

The robust import rate can be attributed to multiple factors. Several significant supply events have forced East Coast markets to rely on outside product more than usual because of the rationalization of refining capacity in PADD 1.

Events like these, along with the recovery in U.S. gasoline demand that has taken hold faster than in other developed markets, has opened the arbitrage window. Rising U.S. prices have inspired imports to burgeon, with refiners and suppliers pushing cheaper barrels to the higher-priced market. Even though RIN prices are near all time highs and importers are obligated to buy RINs to cover their cargoes, there is still enough of an arbitrage (arb) to keep imports elevated. It should be noted that several gasoline components that might fall under gasoline blending component umbrella like naphtha, reformate and alkylate are not subject to RINs.

As of last Friday's close, the spread between US ethanol and US gasoline futures was almost $10/bbl (blue line below). As the largest component of the RIN obligation for gasoline, this helps explain the widening spread between US and European gasoline cracks noted above. For the gasoline arb to the US to be truly believable as an indication of real demand, the Europe to US gasoline arb only exists if the spread is enough to cover the cost of the RIN obligation. At the moment, it is.

In addition to the open arb, the current gasoline import picture also concerns what is coming and where it is coming from. The regulations-streamlining process from the EPA that started on January 1 has made it easier to manufacture on-spec reformulated blendstock for oxygenate blending (RBOB). As a result, imports of what is also known as F-grade gasoline are coming from far-flung places. "Cargoes from basically everywhere showing up in NYH," a trade source said, referring to New York Harbor, adding that they are bringing in F-grade. EPA's new streamlining rules simplify the agency's regulations for gasoline and diesel without changing the stringency of existing fuel specifications. The rules allow testing only for RVP, benzene content and sulfur, and have made it easier for processors, blenders and importers to make RBOB that is deliverable on the CME Group's NYMEX exchange.

Sources and analysts believe that it is not just the arb window being open or the EPA's new streamlining rules that have boosted gasoline imports, but more a combination of the two.

There has been weak demand for gasoline in Europe, West Africa and Latin America and that has pushed barrels to the U.S. where demand recovery is taking place more solidly. However, even demand picking up in those parts of the world is not likely to deter hefty imports coming to the U.S. as gasoline prices in the futures market and in U.S. spot markets trade at multi-year highs. We see this in the data below which reveals continued moves higher in NYH gasoline futures curve over the last 2 weeks.

In both WTI and RB markets, the calendar 2022 & 2023 strips seem to be unstoppable (left chart = RB, right chart = WTI, below). US gasoline futures are definitely matching or exceeding the pace of the rally in crude oil prices which both settled at yearly highs last Friday.

Finally, the US inventory picture this year has materialized as another stabilizing force underpinning prices. In total, combined US crude oil, gasoline and distillate inventory levels through week-ending May 28, 2021 are at their lowest levels since 2018 and are even below 2015 levels (purple line vs gold line below, in thousand barrels).

At this point, it's fair to say that the 'inventory' narrative needs to take a back seat to production growth. This narrative is getting tired and isn't one that holds much weight at the moment. If inventory were still so problematic, oil prices would not have been able to sustain the rally it has this year. In fact, in 5 out of the last 6 years, US crude oil and product inventories have experienced a gradual decline from now through the end of summer (the only exception being 2015).

As unbelievable as it may seem, we are now in a tight market headed into the summer. The summer season has the potential for storm and other weather related supply disruptions, something that may push markets to the extreme. Ain't no stopping us now!

Of Note Over the Weekend

  • According to GasBuddy data, Saturday US gasoline demand rose 6.20% from the prior Saturday, and was 8.10 % higher than the average of the last four Saturdays. Weekly (Sun-Sat) gasoline demand hit a new post-COVID record, up 0.60% from the prior week.

  • Troubled Singapore-traded oil driller KrisEnergy Ltd. said it isn’t able to repay debt and will proceed to liquidation as its liabilities exceed assets and there is a lack of an acceptable alternative restructuring option.

  • Environmental and tribal groups opposed to Enbridge Energy’s ongoing effort to replace its aging Line 3 crude oil pipeline are planning large protests in northern Minnesota as the Canadian-based company gears up for a final construction push. Organizers say they expect hundreds of people to participate in the “Treaty People Gathering” on Monday, which they are billing as the largest show of resistance yet to the project. They plan to march to the headwaters of the Mississippi River, one of the water crossings for the pipeline, where they will deliver speeches and participate in organized civil disobedience.


EIA Inventory Statistics Recap

Weekly Changes

The EIA reported a total petroleum inventory DRAW of 0.50 million barrels for the week ending May 28, 2021 (vs a draw of 8.00 million barrels last week).

YTD Changes

Year-to-date cumulative changes in inventory for 2021 are DOWN by 49.10 million barrels (vs down 48.60 million last week).

Inventory Levels

Commercial Inventory levels of Crude Oil (ex-SPR) compared to prior years are no longer at excess levels and should continue to draw as long as backwardation in the market persists.


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