Happy Friday!
WTI crude touched four-month highs this week before pulling back a bit by Friday. On Monday, crude opened up more than 3%, with gasoline up 15 cents a gallon and diesel up almost 25 cents. Over the past weekend, Saudi Arabia shut down its east-west pipeline, which normally moves 7 million barrels a day and had been covering half of the crude transport lost from the strait of Hormuz closure. The shutdown came after the Houthis, using Iranian intelligence and weapons, pulled off a fast occupation of an island in the Red Sea strait. They effectively closed the strait and hit a Saudi export facility along the pipeline route. Saudi Arabia gave no timeline for reopening and said it has about a week of inventory left before exports stop entirely. Saudi Arabia struck back in Yemen, but the Houthi response was massive, destroying large parts of Saudi military bases, radar, and ammunition. Trump also said over the past weekend he wanted to broker a deal between Ukraine and Russia to stop them from attacking each other’s energy infrastructure, and by midmorning Monday he announced a deal was in place. The market whipsawed on the news, and diesel gave back its entire 25 cent gain.
On Tuesday, Saudi Arabia announced the east-west pipeline would be down 3 to 5 weeks, sending prices sharply higher to start the day. And the truce between Ukraine/Russia on attacking energy infrastructure didn’t even last a day. Ukraine struck another Russian refinery early Tuesday morning, and Russia retaliated with a 200-drone attack on Kyiv. The attacks pushed prices, especially diesel, even higher. Ship traffic through the Strait of Hormuz slowed further as the regional escalation continued. All eyes turned to the Fed’s Wednesday meeting, with traders betting on a rate hike. However, the big question was whether it’s been already priced into the crude oil market.
On Wednesday, oil prices fell after Saudi Arabia said it would reroute the pipeline’s canceled cargoes through its export facility in Oman. It was good news, but it doesn’t change the overall supply picture. We may be near a ceiling on crude oil prices, but there still isn’t enough product to bring prices down meaningfully. Europe remains in bad shape on diesel, and Russia announced its diesel export ban will run at least through the end of October. Higher diesel prices are finally starting to hit European demand, and if that pace continues, a recession there by year-end isn’t out of the question. At home, the EIA reported only a small 600,000-barrel draw in crude, alongside builds of about 1.5 million barrels in gasoline and diesel. The news was nothing dramatic enough to move the market. The Fed decided to raise rates a quarter basis point. Although the stock market collapsed, the announcement did not move crude oil price, confirming that the rate hike was already priced into the market.
On Thursday, oil prices retreated further as traders saw the Saudi pipeline restart tracking ahead of schedule, and the Oman exports began flowing as expected. Ship traffic through both Hormuz and Bab el-Mandeb remains very light. Ukraine struck yet another Russian refinery. This was the second in three days, continuing to squeeze world diesel prices. There was more positive talk of American oil companies investing in Venezuela, but any real production increase is still at least a year out. At home, there is growing talk of limiting US diesel exports as diesel prices push the economy closer to recession. However, a diesel export ban would maybe lower prices temporarily, but would eventually make prices move even higher due to the refiners need to capture the spread lost on the open world market. With the Fed’s rate move higher, traders don’t see higher rates doing much to slow inflation at this time. The only real fix is bringing energy costs down, and without a deal in the Gulf or with Russia, a recession may be the only path left to get there.
By Friday, crude prices eased back a bit after touching four-month highs. There’s cautious optimism heading into the weekend that Saudi Arabia will continue progress on the east-west, and Saudi announced higher cargo exports for October. China also started exporting diesel again. Although the volume is not very high, every barrel helps in this tight market. China reportedly reached out to the Houthis urging them to stop attacking Saudi oil infrastructure, since the disruption is also hitting the crude China buys from Saudi Arabia.
The Chicago spot market went absolutely wild this week. I’ve been saying for weeks how tight the market is heading into harvest, and that any refinery hiccup could send spot prices exploding. Well, that’s exactly what happened. Two refineries went down: Mobil Joliet and BP Whiting. Diesel prices in our market spiked more than 50 cents a gallon in two days, and gasoline jumped close to 25 cents. I expect gasoline and diesel to move noticeably higher at the pump. With harvest demand hitting right as these refineries are down, prices are likely to stay elevated until the refineries are back to full capacity. And if crude prices stay calm, we should avoid $7 diesel.
Propane price followed crude oil price higher again this week. I expected a small move as winter fundamentals set in, but this week’s jump was touch more than I anticipated. Although I don’t expect much more movement higher from here. We’re likely at a ceiling until crude prices pick a clear direction. You can still lock in pricing for the coming winter to protect yourself from any price volatility.
As always, if you have any questions please feel free to give us a call. Have a great weekend!
Best regards,
Jon Crawford