Happy Friday!
WTI whipsawed all week, spiking early and again midweek before falling back hard on Friday from surprise reserve releases out of Europe and the IEA.
Monday, oil opened 3% higher after Trump rejected a weekend peace proposal from Iran that would have fully reopened the Strait with no restrictions in exchange for ending the US naval blockade. Trump responded by saying that until Iran’s nuclear program is dismantled, he plans to resume bombing after the midterms. By midmorning, though, prices had slipped back to flat. Saudi Arabia resumed loading in the Red Sea now that its East-West pipeline is fully back online, and more Gulf oil has been flowing than previously reported. At home, the 10-year Treasury hit its highest rate in over 20 years. If the 10-year drops below short-term rates, a recession is a real possibility. Trump also brought diesel export limits back into the conversation causing some market confusion.
Tuesday, oil eased as traders kept digesting the extra supply coming out of the Middle East. Diplomatic relations with Iran remained strained, and Iran was openly pessimistic about any deal before the midterms. Adding to Middle East uncertainty, the US is pulling its remaining troops out of Iraq after more than two decades. Iran called it a victory, and there are real unknowns about how this affects security for Big Oil’s investments in Iraq. On the diesel export front, there was an interesting twist. The administration is looking at allowing off-road diesel to be used in some on-road applications, which would remove the 55-cent-a-gallon federal diesel tax and offer some real price relief.
Wednesday, crude recovered a bit from Tuesday’s selloff, but gasoline and diesel futures rose as spot markets started tightening with harvest underway and diesel demand holding firm. Russia reiterated it won’t export diesel in October, and Qatar confirmed that Iran-US diplomacy isn’t going well. In a surprise, though, global crude flows look to be back near 2025 volumes. But prices are staying high simply because countries are bidding aggressively for any open barrels to refine into diesel at home. The US released its final batch of crude from the SPR. So basically, there’s no more “magic wand” left for excess US supply. The EIA reported draws in crude and refined products as refinery utilization dropped from its record highs, which tracks with what we saw in Chicago earlier this month. Refineries are either breaking down or being forced into maintenance after being run flat-out all year. That domino effect could keep diesel prices elevated into year-end.
Thursday, oil took off for a number of reasons. China again suspended all oil product exports, pulling away the supply cushion that had just started to form. Strait exports continued to freely flow, but diesel exports specifically are still way down. Iran said it would reciprocate any US military strikes and is demanding diplomacy to end the standoff. Then, in a surprise move, Trump demanded Europe release its diesel stockpile to help bring global prices down or face reduced diesel export sales from the US. It is worth remembering that Russia is still withholding all 12 million barrels a day of diesel exports that normally go to Europe, and Europe has been reluctant to tap its own cushion without knowing when Russian diesel comes back. Trump again floated a partial diesel export ban, though he now believes it would actually push gasoline prices higher. And industry experts keep reminding everyone that if diesel exports are capped, refiners will simply make less diesel to stay competitive on the world market. One piece of news got buried that could matter. India started hiring ships to grab oil in the Strait, and the US warned that any ship-to-ship transfers from Iranian vessels would trigger sanctions.
Friday, oil collapsed after Europe agreed to release 50 million barrels of diesel from its reserves and the IEA added another 50 million barrels of crude. Russia even said it might release some open diesel barrels in October if it has the capacity. Even with diesel prices falling on the news, the WTI-Brent spread didn’t narrow, which was a bit surprising. Meanwhile, a third aircraft carrier and 10,000 troops showed up in the Gulf. The action was a sign Trump may be preparing for a larger military operation. On the longer-term front, Canada approved a financial package to speed up expansion of its coastal pipeline export system, which would let it move more barrels away from the US toward higher-bidding global buyers.
The Chicago spot market went on a wild ride this week. Gasoline differentials jumped to start the week, but collapsed while the Group shot up to record highs. The arbitrage move was severe enough that companies from neighboring states came into Wisconsin to buy cheaper gas, draining terminals in Madison and other cities and causing outages at some gas stations. Diesel differentials, meanwhile, collapsed to near-month lows. With Chicago diesel spot price now running more than 30 cents under the Group, including gasoline, I expect long lines and tight supply at Wisconsin terminals right as harvest demand peaks. I expect gasoline prices at the pump to hold steady, while diesel should keep declining. The timing will provide some price relief as farmers hit the fields.
Even with crude trading in a narrow range this week, propane price kept slowly climbing. Our retail price is now five cents under our prepay contract price. The moves higher have been a bit of a head-scratcher given how plentiful inventories are, but the leading theory is that producers are pushing price ahead of a potentially strong corn drying season, trying to capture profit now before a predicted warm winter with lighter demand sets in.
As always, if you have any questions please feel free to give us a call. Have a great weekend!
Best regards,
Jon Crawford