Happy Friday!
This week was the realization that the world is dealing with three major wars all affecting world supply of oil and refined products. Instead of conflicts easing, we are moving into the end of year with escalating conflicts rather than resolutions.
Monday, the biggest story was an attack on Riyadh International Airport in Saudi Arabia. Houthi militants struck Terminals 1 and 2, killing 12 people and injuring over 300, forcing an immediate shutdown. And then they hit the airport again the following day, canceling more than 1,000 flights combined. Attacks on ships in the Strait of Hormuz also continued, overshadowing Saudi Arabia’s announcement that it’s expanding its East-West pipeline to 10 million barrels a day. On the supply side, Trump claimed he’d struck a diesel supply deal with Russia, along with a truce between Russia and Ukraine on attacking each other’s energy infrastructure. The deal is an odd one, since Trump signed a new sanctions law against Russian imports just three weeks ago, and it’s still unclear how the diesel barrels would actually enter the market. As for the ceasefire, neither Russia nor Ukraine confirmed any such deal by end of day Monday.
Tuesday, oil held flat as traders weighed the Russian diesel deal against the attacks in Saudi Arabia. Lawmakers questioned whether the Russia deal violates US sanctions law, and regardless, it won’t do anything to bring prices down before the election. The bigger story on Tuesday was that Iran appears to be gearing up for war, with some predicting it could escalate further alongside the Houthi attacks on Saudi Arabia. Iran also stepped up its own attacks on ships in the Strait. The market took a breather after WTI hit its highest price in a month around $95.
Wednesday, oil started climbing again as more signs pointed to Iran building toward a bigger strike on Saudi Arabia and the Strait. A ship crossing the Strait hit a mine Wednesday morning, and another was hit by a projectile. Iran stated publicly that it plans to close the Strait entirely before the US election to influence the outcome. The IEA finished analyzing Trump’s diesel deal with Putin, and based on current Russian output, the proposed barrel release would only cover about two weeks of US diesel demand. And the additional releases Trump mentioned aren’t even possible given the damage to Russian refineries. Russia also struck 30 energy sites in Ukraine, undercutting any ceasefire Trump claimed earlier in the week. At home, inflation rose 0.6% in September, well above expectations. Half the increase came from higher food and energy costs. The Fed is still planning one more rate hike this year, and at this pace, recession odds keep climbing in prediction markets.
Thursday, oil again rose further. Attacks on ships in the Strait kept climbing, and Ukraine announced more strikes on Russian refineries. Even as the Trump administration discussed easing sanctions on “shadow fleet” tankers moving Russian and Iranian crude, traders believe continued strikes on energy infrastructure in both the Gulf and Russia will keep weighing on the market. The Houthis struck Saudi Arabia again, this time hitting Saudi Aramco’s headquarters. Iran has now struck energy infrastructure more than 135 times since the war began, and countries are growing concerned about the level of intelligence Iran has to strike with that kind of precision. The EIA reported a large draw in crude and diesel inventories, adding further pressure to prices. Even with inflation running hot, gasoline and distillate demand remains average. Traders are now starting to believe crude prices could stay elevated well into 2028. And while Europe and others are releasing product stockpiles, until demand actually cools we’re looking at higher for longer. That said, if the 10-year Treasury yield stays elevated alongside high inflation, a US recession is a real possibility.
Friday, oil looked to close roughly flat on the day but up over $5 a barrel for the week. The good news is crack spreads fell sharply from record highs, offering some relief on gasoline and diesel prices. Even with crude still elevated, the drop in crack spread will help keep a lid on things. The White House pressured Ukraine Thursday evening by limiting its satellite communications access, aiming to diminish further strikes on Russian refineries. Friday morning brought a reminder of how broadly high energy costs are spreading. Freight costs are now up over 19%, the most in four years, and that’s working its way into the price of nearly everything. Investors are nearly certain another rate hike from the Fed lands by year-end. Without cooling inflation and a real pullback in demand, I don’t see a path to cheaper gasoline and diesel by year-end. Realistically, it will take all three current wars ending and a drop in world demand for a true recovery in the oil market, especially diesel.
Chicago had quite a ride this week. The spot market pushed diesel costs up over 50 cents in three days, only to come back down just as fast. Gasoline took a similar but smaller swing. I expect gasoline prices at the pump to hold and diesel to ease a bit. Although we’re still deep in high diesel demand for harvest, so anything can happen. Any supply disruption would send diesel prices right back up. For now, harvest is moving along well and supply is keeping pace. Let’s hope that holds for another four weeks.
Propane prices kept climbing again this week. There was a large draw in inventories reported Thursday, but we’re in the middle of corn drying season. And the country is still sitting on healthy inventory levels with shipments from Canada moving along just fine. Even with exports running at full capacity, we should have more than enough supply to handle a cold winter. Production should stay strong as long as crude prices and crack spreads remain elevated. Propane seems to now be trading in tandem with crude oil prices. So until crude oil prices come down, we will probably experience higher propane prices.
As always, if you have any questions please feel free to give us a call. Have a great weekend!
Best regards,
Jon Crawford