Happy Friday and Labor Day Weekend!
Oil prices jumped 3% early Monday as the US attacked Iran’s Larak Island. The reason was that the US believed Iran was preparing to place mines back in the strait. Iran responded by launching missile attacks on US bases in Jordan. These were the first attacks since July. Iran’s president continues to say he wants a negotiated peace deal, but the details keep getting lost in translation on both sides. On the supply side, Trump announced over the past weekend that the US and Venezuela struck a deal to secure 65 billion barrels of Venezuelan oil. The deal would be absolutely historic, though details remain a bit murky and open-ended. If it holds, the US would be able to refill our massively depleted oil reserves with cheap oil at a clip of about 1 to 1.5 million barrels a day, all while letting American oil companies compete in the open world market. The catch is figuring out how long and how much money it will take to bring the Venezualan infrastructure up to speed for exporting at that capacity.
On early Tuesday morning, two Saudi Arabian supertankers were struck in the strait, reaffirming that the strait not 100% open for shipping. Trump responded by again attacking Iran’s munitions along the strait, and Iran retaliated with attacks on American bases in various countries. These strikes pushed crude prices to $90 a barrel. Diesel prices jumped dramatically due to tight world supply, and now the limited diesel coming out of the Gulf is under attack too. On top of that, Tropical Storm Edouard is projected to hit Gulf Coast refineries next week. Since we have no spare refining capacity in the US, any storm-related shutdowns could send prices, especially diesel, jumping further.
On Wednesday, the day started with no movement from either the US or Iran toward de-escalation. Trump continued with rhetoric that all military options are back on the table and peace isn’t currently an option. Meanwhile, Russia had to again take one of its largest refineries offline for the third time, this time due to a Ukrainian drone attack over the past weekend. Given Russia’s ongoing supply constraints, I don’t see a path toward increased Russian exports anytime soon. On the US supply side, the EIA report stated crude oil inventories posted another loss, pushing our nation’s reserves even lower. At this point, I don’t see any options on the table that could bring gasoline and diesel prices down.
Early Thursday morning, Iran attacked Kuwait in response to US attacks the day prior. There were no immediate reports of damage, but the move reiterates that Iran isn’t backing down. The strait continues to see only limited traffic. In a surprise move, though, Iran is allowing more Iraqi crude to flow through as Iraq ramps up production by 1 million barrels a day. It’s still too early to tell whether that increase will affect the market until the Iraqi shipments start flowing consistently. At home, the average US diesel price hit above $5.85 a gallon. That is the highest since the conflict with Iran began. The Federal Reserve announced another issue Thursday that I’ve been watching closely. The FED has concern over how many refineries will go down for maintenance next year, adding more pressure to an already tight diesel market. Unless a recession hits, expect higher diesel prices for longer.
By Friday, crude oil looked to close the week with its largest weekly gain again since July. Heading into the holiday weekend, gasoline prices remain stubbornly high and diesel prices continue to climb. Friday’s jobs report showed an uptick in hiring with unemployment holding steady, giving the FED a bit more room to consider raising rates to cool the economy and inflation. However, many believe a rate hike would push the economy toward recession without doing much to ease inflation driven by high energy prices. Crude oil did take a breather Friday, since a rate hike puts downward pressure on prices, but there’s still a long way to fall before consumers see real relief at the pump.
The Chicago Spot Market had a major announcement this week. The Buckeye pipeline connecting Chicago’s refining market to the import-dependent Northeast was officially approved to begin shipping products. This will be a game changer for Chicago refineries that have been looking to expand into new markets with their high production rates. However, it could also drain away the glut of product that’s kept prices lower in our region. The Northeast is willing to pay a premium to avoid relying on imports. That means the days of having the cheapest fuel east of the Rockies could be behind us in the coming year. Given the sharp rise in diesel costs, I expect retail diesel prices to climb higher. Gasoline, on the other hand, has stayed stable as the high-demand season winds down and winter-blend fuel hits the market. I don’t expect much movement in gas prices over the holiday weekend.
Propane prices ticked up slightly this week in tandem with crude oil. And Wednesday’s report showed a massive draw in propane inventories. I believe that the reported draw was an anomaly and balancing out for month end. That said, propane fundamentals remain bearish overall, so I’m not too concerned about this past week’s movement. We’re still writing contracts for this coming winter and topping off tanks at summer rates.
As always, if you have any questions, comments, or concerns, please feel free to give us a call. Have a wonderful and safe Labor Day Weekend!
Best regards,
Jon Crawford