Happy Friday!
WTI crude started the week near $90 a barrel and spent the week pulled back and forth by Middle East escalation, a Gulf hurricane threat, and international reserve releases before settling back just above $90/barrel on Friday.
Monday, crude opened around $90 and closed even lower. The G7 met and committed to releasing another 100 million barrels of diesel and crude stocks, and agreed not to limit their own exports. Trump followed suit, saying the US wouldn’t limit diesel exports either. Middle East Gulf supply remains healthy, and even with the Strait technically still closed, flows are strong enough to keep prices from blowing out. The real issue keeping prices elevated is low global inventory. The world has lost about 3 billion gallons of crude since the war began and only 1 billion made replaced using reserve releases. This means it could take up to two years to refill global reserves even at an extra 2 million barrels a day of production. Just as producers started discussing that process, the Middle East Gulf instability returned with renewed fighting between Saudi Arabia and the Houthis in Yemen. Saudi Arabia is now fighting back, and the risk of a strike on refineries or ports being attacked is on the table.
Tuesday, the big news was Trump announcing a vague executive order allowing dyed diesel which doesn’t pay federal road taxes to be used on highways. The order stated that penalties would be waived and taxes deferred until January 1, 2027. There are a lot of problems with this order. It’s a tax deferral, not a cancellation, and only Congress has the authority to cancel taxes. It’s unclear Trump even has the power to defer them. Treasury and the IRS haven’t issued any guidance yet, and state road taxes and sales tax still apply regardless of what the federal order says. In my opinion, the order has caused nothing but confusion and probably won’t amount to much. Right now, using dyed diesel on-road still exposes you to state fines, and if dyed fuel is still in your tank after January 1, your vehicle won’t be road-legal. The red dye lingers in filters and tanks for a long period of time. While crude flows are back near pre-war levels, diesel and jet fuel supply are still running at only 60%. I don’t expect diesel prices to come down quickly. There was some good news on Tuesday regarding the fighting in Yemen. The Saudis helped the Yemenis retake the entire coast where the Red Sea export facility sits. The announcement calmed the market a bit and kept WTI below $90.
Wednesday, oil rose again on Middle East attacks and a hurricane forming in the Gulf of Mexico. The hurricane currently is on track to possibly knock out 15% of US crude production. With refiners already running at near-breaking capacity, any damage to refining units could cause another diesel spike. Iran and the Houthis ramped up attacks including hitting ships and a Saudi airport. The US said no deal would happen without major changes to Iran’s nuclear program. The US naval blockade has indeed kept all Iranian crude stuck in the Gulf. With supply tightness becoming a real concern heading into winter, the IEA is working out how to release its promised 100 million barrels. Although the news held prices steady due to lack of clarity. Ukraine struck another Russian oil depot and refinery, and Russia retaliated with major strikes. The Iran and Ukraine conflicts are once again driving most of crude price action. At home, the EIA reported crude inventory draws, adding further support under the price floor.
Thursday, oil jumped nearly 4% on reports that Washington was drawing up plans for a major strike on Iran before the midterms. Attacks on ships in the Strait are picking up, and only seven ships crossed on Wednesday. That was the lowest since late July. Oil from Oman and the Red Sea is flowing at higher rates helping to keep somewhat of a lid on prices. At home, a day after the hurricane warning, US producers shut down 25% of Gulf oil production. And the Saudi-Houthi fighting escalated further while Syria said it might send troops to help Saudi Arabia.
Friday, crude held steady after Trump announced Thursday night he would not attack Iran before the midterms. Iran has received a proposal from the US and plans to review it within seven days. The Gulf hurricane threat kept accelerating shutdowns. In a single day, production cuts jumped from 25% to 46%. Refineries and chemical plants aren’t included in the shutdowns yet, but up to 500,000 barrels a day of diesel refining capacity is at risk. If we lose 500,000 barrels per day of diesel production, this would add real stress to an already tight diesel market. Crack spreads for US refiners fell Friday after China said it would resume fuel exports in October. The news was very positive for a world market that’s extremely tight on refined products. The Saudi-Houthi conflict and the Russia-Ukraine strikes both continued strong into Friday and neither shows signs of slowing down.
In the Chicago spot market, we’re still seeing gasoline outages at terminals as out-of-state buyers cross into Wisconsin for cheaper gasoline than what’s available in Iowa and Minnesota. Those outages are putting pressure on trucking, with wild price swings. Diesel spot prices have unfortunately rocketed higher alongside crude and heavy harvest demand. I expect gasoline prices at the pump to hold while diesel price will climb over the weekend and into next week. Until harvest wraps up, I think diesel prices will stay a bit inflated.
Propane prices surprisingly keep climbing. Crop-drying demand has been strong, and propane continues to track crude oil higher. Retail prices are on pace to surpass winter contract pricing possibly by the end of October. Contract price surpassing usually doesn’t hit until January or February, so this early move is a bit concerning heading into peak winter demand. Anyone who locked in a contract is protected from this current unusually volatile propane market.
As always, if you have any questions please feel free to give us a call. Have a great weekend!
Best regards,
Jon Crawford