Happy Friday!
Oil is ending the week right around $92 a barrel, roughly where it started. It was one of those weeks where everything went back and forth: good news, then bad news, then good news again. Every time it looked like a deal might be coming together, something happened to push it off.
The back-and-forth on peace talks was the story all week. Monday started with the US and Iran exchanging new strikes over the weekend, which erased the optimism from the prior Friday. Tuesday things brightened up when Iran said it was actively reviewing a proposed ceasefire deal and Trump told the public he expected an agreement to reopen the Strait within about a week. Then Wednesday, Iran fired ballistic missiles at Kuwait and Bahrain. Both Gulf countries that had not been directly targeted in months. The US struck back near the entrance to the Strait, and the whole diplomatic process collapsed again. Thursday, the Trump administration announced a ceasefire between Israel and Lebanon, which is a big deal because Iran has said all along that Lebanon has to stop fighting before it will agree to anything with the US. Oil prices dropped sharply. Then Friday morning, Hezbollah said it never agreed to the ceasefire terms and rejected it, Israel said it wasn’t leaving Lebanon, and we were essentially back to square one. The market held steady rather than crashing, which tells you traders are cautious but not panicking. Nobody is ready to bet big that this gets resolved soon.
The oil supply situation around the world keeps getting tighter. Last week’s government inventory report showed US crude stockpiles fell 8 million barrels in a single week. Again, one of the biggest one-week drops since this whole crisis started. We are now sitting about 3% below where inventories normally are this time of year. Gasoline is 5% below normal, diesel is 3% below, and refineries are already running near full speed trying to keep up. The total amount of oil stored in the US, including the Strategic Petroleum Reserve, has dropped for ten weeks in a row and is now at its lowest level since 2004. The head of the IEA’s oil markets division warned this week that global inventories could hit critical levels just as summer demand picks up. That is not a minor concern. The IEA is the world’s top energy agency telling us the cushion is nearly gone. Therefore, we might not be able to keep kicking this can down the road.
Iran’s oil exports have all but collapsed. New data this week showed Iran was only exporting about 200k barrels per day in May. This is a six-year low, down from 1.3 million in April, and nearly 1.9 million back in March. The US naval blockade is working. There are currently about 145 million barrels of Iranian crude sitting on tankers at sea with nowhere to go, roughly 65 million of those trapped inside the Gulf. Even at these low export volumes, Iran is having to discount its oil just to get Chinese buyers interested, because Chinese refineries are cutting back amid weak demand at home.
Russia is in the same boat in China. Russia’s oil is also getting discounted. Russia also admitted this week for the first time that its overall oil production has dropped this year. The prime minister blamed routine maintenance issues, but Ukraine’s ongoing drone strikes on Russian oil infrastructure, including a terminal in St. Petersburg hit this week while Putin was hosting his annual economic forum in the same city, are widely seen as the real reason.
Looking into the future, Saudi Arabia and the UAE are spending billions to build new pipelines and export routes that bypass the Strait entirely. They learned from this crisis that relying on one waterway is too dangerous. These new routes will stay in place long after this conflict ends. Meanwhile, India raised fuel prices again. India has raised fuel prices four times since mid-May, and it is already starting to slow down diesel demand in the trucking industry. When Indian truck drivers start cutting back, that matters globally.
Back home, the May jobs report came in much stronger than expected. The US added 172,000 new jobs, more than double what economists were forecasting, with unemployment holding at 4.3%. Good news for workers, but it complicates things for the oil market. Strong job numbers mean the Federal Reserve has less reason to cut interest rates, which keeps borrowing costs high, which eventually slows economic growth and reduces fuel demand. In addition, higher interest rates inflated oil prices due to oil being traded on the US Dollar. The 10-year Treasury yield moved higher to 4.47% heading into the weekend with no rate cuts anywhere in sight.
Chicago finally had a calmer week. The spot market continues to balance with the Group Spot market, and both gasoline and diesel prices moved normally alongside crude oil. Both products have now settled at lower average prices than we saw earlier in the crisis. This is a good time to be buying fuel. Gasoline retail prices should hold roughly steady. There was some volatility this week that may take a few days to fully shake out. But diesel pump prices should keep coming down heading into next week.
Propane prices have not come down despite crude oil pulling back, despite an inventory build this week after export volumes dropped. Inventories had been stubbornly flat during what should be the normal build season, so any increase is positive news. However, traders are still bullish propane exports long-term. Right now is a very good time to lock in your heating gallons for next winter before any surprises push prices higher. We have prepay, budget, and price-lock options available. Give us a call and we will get your summer fill scheduled and talk through your contract choices!
As always, if you have any questions please feel free to give us a call. Have a great weekend!
Best regards,
Jon Crawford
Sources: Bloomberg, Reuters, Wall Street Journal