Good morning!
Happy Friday! I hope everyone is ready to enjoy a safe and relaxing Memorial Day weekend. Crude oil prices are looking to close lower for the first time in weeks, with this being the first weekly decline since April. Despite the drop, the price action this week was narrow considering all of the geopolitical and economic headlines that could have sent the market sharply in either direction. The main drivers of higher price speculation continue to come from the Middle East. Israel appears to be preparing for possible attacks on Iranian nuclear sites. In response, Iran has threatened to shut down the Strait of Hormuz if Israel follows through. The Strait of Hormuz is the most critical shipping corridor for crude oil in the world. At the same time, discussions between Russia and Ukraine have stalled again. Although Russian oil continues to flow, China and India are buying cheap Russian barrels and storing as much as possible while prices remain low.
Back in the U.S., Trump is threading the needle on foreign policy and economic deals in the Middle East. The administration is actively cutting deals with both allies and adversaries. If these agreements are successful, they could reduce regional tensions and bring major economic benefits to the U.S. Additionally, there is growing chatter that the U.S. may not renew leases in Venezuela that allow Chevron to export crude to U.S. Gulf Coast refineries. If these leases are not renewed, the loss of Venezuelan crude would be a blow to the southern U.S. refining sector. The one piece of geopolitical news that pushed crude lower was progress on trade negotiations between the U.S. and China. Both countries are making strides toward a deal, and any agreement would likely increase economic activity and boost crude demand.
On the supply and demand front, bearish news mostly dominated the week. Crude inventories in the U.S. continue to grow, but demand is expected to rise heading into summer, which could balance out the market. The U.S. government is also continuing to refill the Strategic Petroleum Reserve. Meanwhile, refining margins remain strong, giving oil companies incentive to keep buying crude and produce refined products for domestic use and export. Looking ahead, OPEC meets on June 1st and is expected to announce a significant increase in global exports. If OPEC does indeed bring more barrels to market, a surplus becomes a real possibility. That said, U.S. drillers are continuing to shut down rigs at a quick pace, which could help offset the potential surplus from OPEC and keep the market balanced. Adding to the market’s volatility are continued tensions in Gaza, new tariffs aimed at pressuring Apple to manufacture iPhones in the U.S., additional sanctions on the European Union, and the upcoming hurricane season. Summer demand in the U.S. is also set to pick up soon, which could add further pressure to prices.
Even though crude oil is closing lower this week, I still don’t see prices falling too much further. We may briefly dip into the upper $50s per barrel, but I don’t believe prices at that level would hold for long.
In local news, gasoline and diesel supplies are finally balancing out in the Chicago market. I expect to see both products move lower in price next week. Thankfully, refinery maintenance on gasoline production is wrapping up just in time for the summer driving season. The Chicago Spot Market continues to trade cheaper than the Group, but the spread is not wide enough to cause Group buyers to switch over to Chicago barrels. That said, the discount is helping to keep inventories in our region at healthy levels.
Propane prices remain stubbornly firm as Midwest inventories continue to lag about 20% behind the five-year average. I don’t expect much of a drop in price from here. My recommendation remains the same: top off your tanks now and consider locking in some gallons for next heating season. Contract pricing for next year has been released, and it’s the same as last year! With the cost of nearly everything else continuing to rise, it’s great to be able to offer customers good value on something as essential as home heat.
As always, if you have any questions, comments, or concerns, please feel free to give us a call. Have a great weekend and enjoy your Memorial Day!
Best regards,
Jon Crawford