Happy Friday!
WTI crude fell off a cliff this week, dropping as much as $25 a barrel to close near its lowest level since 2020. Here is what drove the market this week.
Monday, oil fell more than $6 a barrel right out of the gate after Trump said he wants to give diplomacy with Iran more time before resuming attacks. I’m a bit skeptical, since we’ve seen this exact scenario play out plenty of times before. Iran did hold talks with Qatari mediators, but the details of the draft proposal remain murky, and any pause or break in negotiations could snap prices right back higher. I also think a lot of traders were simply taking profits ahead of Tuesday’s election. With crude above $100 and four straight weeks of gains, it’s an easy win to lock in before buying back after midterms. OPEC confirmed over the weekend it would keep December production steady. But Kuwait announced its October output hit 2.1 million barrels a day, the highest since before the war. Diesel remains the hot topic with some officials pointing to 35-year lows in inventories over parts of the world. The reported shortage is keeping diesel futures elevated heading into next year.
Tuesday, oil bounced back a bit from Monday’s selloff, which I still think was mostly pre-election profit-taking. Iran said it’s nowhere close to a deal with the US, and the US carried out defensive strikes on the island of Qeshm. The attack was reported as a continuation of limited strikes it’s made in recent weeks as Iran keeps attacking ships in Hormuz. In other words, nothing fundamentally changed in the region, just the level of escalation. There was more talk of a supply surplus building out of the Gulf, with Saudi Arabia again raising capacity on its East-West pipeline and the UAE saying it’s shipping at higher rates now that it’s no longer complying with OPEC quotas. Ukraine hit another Russian refinery which has become almost a weekly occurrence for months. And as long as those attacks continue, world diesel supply will remain strained.
Wednesday, oil price fell through a trap door after Democrats took control of both the House and Senate. Even with the dollar falling in value, crude dropped on hopes that Democrats can push Trump toward diplomacy with Iran. Talks with Iran continued to remain weak, and Trump again said he doesn’t plan to attack anytime soon. Although Wednesday morning, four supertankers caught fire after hitting mines in Hormuz, another reminder that Iran keeps attacking ships crossing the strait. The EIA reported another crude inventory draw, with crude, gasoline, and diesel stocks all still running below their 5-year averages, and Gulf oil flows slipped in October as attacks picked up in both straits. But the news on physical economics did nothing to move the needle higher on oil price. The UAE did announce a third pipeline in the works to route around Hormuz entirely. In my view, crude was oversold at the close on Wednesday.
Thursday, crude stabilized after Wednesday’s steepest drop since 2020. A surprise report from multiple large American banks said the first real crude surplus is forming since 2022. With Democrats now controlling Congress, there’s also some concern about a slowdown in economic development that could weigh on a possible government stalemate. We’re not out of the woods, though. Iran still reported on Thursday no progress on talks and continues daily attacks on ships in Hormuz. No one knows Trump’s next move, and with Vance and others breaking from his stance on Iran, there’s a real chance he defies and strikes before Congress can move to curb his executive power. China opened its ports for diesel exports, but only in small volumes. Therefore, we are still not finding any magic bullets to help alleviate low diesel inventories.
Friday, oil looks to close the week at its lowest level since 2020, trading flat Friday as the market recovers from this week’s surprising drop. Iran kept striking tankers in Hormuz going into Friday, and Qatari mediators again, as has happened all week, said there’s been no breakthrough on a peace deal. The oil market looks balanced on paper, but there’s still so much geopolitical risk on the table that I don’t expect another cliff-dive in prices until there’s real progress in Iran and Ukraine. Ukraine struck Russian oil infrastructure again, following a trend for the past couple of months. There’s still no sign that Russia is able to restart heavier diesel production. Even with gasoline and diesel prices still elevated in the US, the economy keeps running hot. Friday’s jobs report showed 165,000 jobs added versus 65,000 expected, and unemployment fell again to 4.1%. With the economy running strong alongside low diesel inventories and high prices, a lot of people are waiting for the other shoe to drop. As I’ve been saying, if these prices hold through the holidays and into early next year, the economy could stall and that’s when we’d see oil prices drop even further. But again, as always, assuming things stabilize overseas in Iran and Ukraine.
Chicago went on another absolute roller coaster this week. Late last week, reports surfaced that the Mobil Joliet refinery wasn’t running at full strength, and nothing new came out over the weekend. Basis jumped to 50 cents over NYMEX, sending local diesel prices spiking fast. But as crude dropped more than $15 a barrel, diesel prices fell right alongside it. In the middle of that collapse, Mobil reported positive news and the basis premium disappeared, landing diesel at its lowest price in months. Gasoline has been more of a peak-and-valley trade, with big swings up and down over the last couple of weeks. As harvest winds down, I expect both gasoline and diesel prices at the pump to move noticeably lower in the coming week.
Propane absolutely ripped higher this week, hitting its highest price in over a year. Fundamentals are still bearish in my view, but exports remain at record levels. Saudi Arabia announced it won’t be exporting propane this year, solidifying the US as the world’s top propane exporter. Even with propane inventories sitting at the 5-year average, that glut is slowly starting to shrink. The glut is not falling fast, but enough during the warmer stretch of the year that traders are placing longer bets on winter propane prices. Propane price did come down with crude’s massive drop, so I do expect retail prices to ease a bit next week.
As always, if you have any questions please feel free to give us a call. Have a great weekend!
Best regards,
Jon Crawford
Sources: Bloomberg, Reuters, Wall Street Journal