Happy Friday!
Oil prices traded mostly flat to end the week as markets digested the continued stalemate in talks with Iran. WTI looks to close near $63 per barrel, continuing a gradual pullback from the recent peak near $66 when tensions escalated around potential U.S. strikes. Tensions with Iran remain front and center. Trump is reportedly sending a second aircraft carrier to the region and met with Netanyahu midweek with Iran high on the agenda. At the same time, Trump warned ships operating near Iranian waters, which briefly supported prices earlier in the week. Iran continues to threaten retaliation if strikes occur. For now, the market appears to be assigning a probability to escalation without fully pricing in a disruption. OPEC+ has begun dropping hints about a possible production increase. I believe the messaging is strategic. If Iranian production were to be disrupted, other members appear willing to step in quickly to calm markets. The signal alone is enough to put a bit of a ceiling on prices.
India has now received a license to purchase Venezuelan crude, signaling strong appetite for heavy sour barrels. The move could help revive Venezuela’s infrastructure if capital begins flowing back in. In addition, Venezuela’s new leadership has allowed peaceful protests for the first time in years, a possible sign that the government is attempting to re-engage with Western partners. India also seized three oil tankers tied to black-market activity, reinforcing its commitment to policing shadow fleet activity. However, while India announced smaller refiners would halt Russian purchases in March and April, I remain skeptical that India will fully sever ties. Russian barrels remain logistically convenient and competitively priced. Russia’s crude output declined for a second consecutive month in January as sanctions complicate marketing efforts. Whether the declines are structural or temporary remains to be seen. If sustained, it could provide leverage for Ukraine in negotiations. At the same time, Cuba is set to begin purchasing Russian crude, giving Moscow another outlet for sanctioned barrels.
The IEA again amended its outlook, now calling for a roughly 2 million barrel per day surplus in 2026, driven largely by new barrels from West Africa and steady OPEC production. The downgrade to demand expectations pressured prices on Thursday. Kazakhstan has already returned to roughly 60% of peak production and expects to be fully restored by month end, adding more supply back into the system. Venezuela has also climbed back to roughly 1 million barrels per day after restoring a key facility, and further gains remain possible into 2026.
In U.S. economic news, the EIA report was a bit bearish announcing further increases in crude oil inventories despite some production cuts. In addition, U.S. CPI came in softer than expected, with year-over-year inflation easing to 2.4% from 2.7% last month. The data continues to support expectations for rate cuts. The dollar fell for a fourth straight day midweek, which helped underpin crude prices. A weaker dollar remains one of the few non-supply factors capable of putting a floor under oil. However, housing data showed home sales falling more than 8% in January, and consumer sentiment continues to soften. But the labor market remains steady. The U.S. added 130,000 jobs in January and unemployment dipped to 4.3%, offering modest support to the demand outlook. Those trends could weigh on future oil demand if the broader economy slows. Again, the U.S. is experiencing bullish and bearish situations that affect the price of crude oil. And a not as common data point that I watch, weather may become a larger wildcard later this year. Meteorologists are predicting an El Niño pattern, which historically brings warmer overall temperatures but more intense storms, heavier rainfall, and an active hurricane season. With increased production and refining concentrated in the Gulf, a busy hurricane season could present more meaningful disruptions than in prior years.
When looking at all the previously described data at a 20k foot view, the underlying theme remains the same: geopolitical tensions may drive short-term volatility, but a structural oil surplus still looms in the world marketplace.
The Chicago spot market saw gasoline differentials weaken this week as demand remains soft and inventories appear comfortable with several winter months still ahead. Diesel prices stayed elevated as the Northeast continues to struggle sourcing barrels, though the spread between Chicago and the Northeast narrowed. Diesel traded mostly flat on the week, so I do not expect significant movement at the pump in the immediate term. As winter blending requirements begin to ease and #1 diesel moves out of the retail system, pump prices should gradually decline. Gasoline prices fell this week, and I expect lower retail gasoline prices next week.
Propane retail prices eased modestly as warmer temperatures allowed shipping logistics to catch up. Allocations west of us have been lifted and rail terminals in Wisconsin are reporting healthier supply levels. If February avoids another cold snap, I expect propane retail prices to decline further this month and into March.
As always, if you have any questions, please feel free to give us a call. Have a great weekend!
Best regards,
Jon Crawford
Sources: Wall Street Journal, Bloomberg, and Reuters