Happy Friday!
Crude oil prices saw a sharp rebound at the end of the week after Ukraine struck an oil refinery in Russia, knocking out roughly 2% of the world’s supply. The attack pushed prices back toward $60 per barrel after collapsing earlier in the week. Meanwhile, Russia continues its push deeper into Ukraine near the Pokrovsk region. Lukoil’s sale of foreign assets continues to find high demand, and Russia intends to use those funds domestically. Despite the recent export disruptions, Russia is still managing to ramp up refining capacity at home. Russian oil is still officially hitting the market, even as China and India continue to avoid additional Russian purchases. Hungary was granted a sanctions waiver, which will give Russia an easy outlet for some of its floating storage and continue supporting production levels. At the same time, Europe has seen an uptick in sabotage attempts, cyberattacks, and drone incursions tied to Russia. And in another development, Venezuela is also gearing up for potential conflict, adding more uncertainty to the geopolitical backdrop.
Prices collapsed midweek as the forward trading curve moved into contango, meaning prices farther out are higher than prompt barrels. That’s a classic oversupply signal, and funds also sold off positions for year-end tax harvesting and booking some gains. Global supply concerns grew after the amount of crude floating on ships hit 1 billion barrels. OPEC members Saudi Arabia, Kuwait, and Iraq also increased shipments to India, and the IEA warned of the potential for a record surplus next year. The combination sent crude prices sharply lower. There was also news that Trump met with the Syrian president as Syria begins exporting oil again. If those barrels grow, they add yet another layer to the oversupply picture.
Despite all the talk of surplus, ExxonMobil and Chevron continue to ramp up exploration. Both are moving into areas that historically haven’t seen much drilling, such as Greece, and are also considering returning to Libya. Oil companies are betting that demand will continue rising over the long term. Their view is that prices may stay depressed for a year or so, but eventually rebalance and recover. OPEC has already revised its outlook to flat demand instead of rising demand, but the IEA now forecasts oil consumption increasing through 2050, giving producers confidence to keep drilling. Still, China’s manufacturing and retail sales data remained very weak—some of the worst readings in years—which throws a bit of cold water on long-term demand optimism. However, the U.S. and China agreed to suspend port fees for each other, a sign that some trade tensions may finally be easing. That could eventually support each economy, but traders remain cautious for now.
The EIA’s latest report showed a large build in U.S. crude inventories, reinforcing the idea that surplus supply is on the horizon. Trump also opened additional areas of Alaska for drilling. Even though the government shutdown ended on Thursday—a potentially supportive event—prices still sold off sharply on Wednesday. The Federal Reserve continues debating whether slowing payroll growth is the result of weaker demand for workers or tightened immigration. Most Fed officials lean toward weaker demand. There is a small amount of support for crude prices based on the Fed potentially holding off on a December rate cut, which keeps the dollar stronger and makes crude cheaper for international buyers. At the same time, there’s growing fear of weaker holiday sales weighing on the economic outlook.
The Chicago spot market has been extremely volatile. Massive price swings continue as refineries come back online and previously closed pipelines reopen. We are hopefully nearing the tail end of one of the biggest supply crunches southern Wisconsin has experienced in years. Gasoline retail prices should hold relatively steady, as gasoline hasn’t been impacted nearly as much as diesel. Diesel retail prices, however, are likely to move higher in the coming week, especially as winter-blended diesel enters the market.
Propane prices continue to trade in a narrow, fairly boring range. Retail prices have moved higher as early winter temperatures have boosted demand. Even so, when comparing BTU value across propane, diesel, and natural gas, propane remains a strong value at current prices. If you are a will-call customer, please check your tank more frequently as we start the winter season—this winter is already running 25 percent colder than last year, and usage can ramp up quickly. We don’t want you to get caught with your tank running out! 🙂
As always, if you have any questions, comments, or concerns, please feel free to give us a call. Thanks and have a great weekend!
Best regards,
Jon Crawford