Be Very, Very Quiet…I’m Hunting For Diesel

Good morning!

Happy Friday!  The crude market was fairly stable this week.  Although crude prices finished a bit higher than last week, WTI has yet been unable to break back above $90/barrel.  Although the crude market is tight, the continued threat of demand destruction is weighing heavy.  China reported slower growth and is facing some incredible headwinds economically.  The middle class in China is very large now and not willing to work the jobs that propelled the country to become the economic powerhouse that they are today.  We could see continued growth in demand from India and Vietnam as labor rates are much lower in the developing countries compared to China.  However, when it comes to FABS for manufacturing chips and cards, the US is really positioning themselves to be a leader along with TSMC.  The good news for China/US relations came as a surprise this week when Xi Jinping announced that he would like to meet with Biden and develop a plan for the countries to work together.  After Xi Jinping’s speech earlier this week than seemed to be combative to the US, the softened tone and request for a meeting was a surprise and welcomed by the US.  Between a stronger separation but working together for common global goals, many are hoping China can pressure Russia into a peace talk if the US pressures Ukraine to the table as well.  If a peace deal could be reached in the Ukraine, the tight crude market would have some breathing room.  All economic data is pointing to a recession in the US.  Even BIG TECH is now not immune to the conditions.  Microsoft, Google, Amazon, Apple, and Meta all took a beating this week on slowing growth.  Home buying hit the slowest pace since the Great Recession, along with the highest mortgage rates in 20 years.  Although the US reported a surprise increase in GDP, the increase really came from exports and not internal organic economic growth.  As I always write, the devil is in the details.  We are now approaching the holiday season, so we will truly start to see the strength of the US retail economy soon.  I understand that much of this report seems not related to crude oil directly, but all of these situations are very important for future crude oil demand.  We will really know more of where the crude market is heading in 2023 by the end of 2022.  So much can still happen in the last two months of this year.  As far as crude production for the US is concerned, we are at pre-pandemic production and could surpass a new record in daily production by end of 2023.  Pres Biden continues to try and use the strategic reserve purchasing strategy to increase capex in the oil industry, but it’s not really needed at this time.  Pres Biden should wait and see if we go into recession.  If the US economy goes into deeper recession, that would be the time to start making oil reserve purchases to keep the oil industry at full capacity.  We would hate to see the oil industry start to cut capex in a recession because we will need to be full-speed ahead coming out of recession in a moments notice.

In regards to gasoline and diesel, I would like to address the announced diesel shortage in the US.  The gasoline market is doing ok.  We are out of peak demand and should be just fine on gasoline supplies for the winter.  Diesel supplies are historically low right now.  And yes, logistically, things are a complete mess.  However, the East of Rockies is getting to the end of harvest season which will dramatically decrease diesel demand.  In addition, there were issues getting diesel into the pipelines at the correct position.  Barge delays hit the East Coast which forced a dramatic shift to pipeline demand.  The Colonial pipeline is the main feed to the East Coast.  But to get diesel into the Colonial from Southern and Midwest refineries takes time and a lot of planning.  So many shipments were booked and already in process before the barge delay hit the East Coast.  Now, here’s the good news.  Barge shipments will hit the East Coast in the first week of November and subsequent deliveries are on target.  The Colonial Pipeline will also have diesel shipments hitting the East Coast in the first week of November.  So basically, the East of Rockies is in what we call a “short squeeze” for the month of October, but I’m seeing some relief going into November.  In other words, the current situation looks to be temporary and no need for major panic.  The news has done a fantastic job of scaring even people in Wisconsin.  We received numerous phone calls this week from customers concerned that there is a diesel shortage in Wisconsin.  It’s unfortunate that the news is causing additional stress during already stressful times.  Now, don’t get me wrong, we are tight on diesel.  And we will be tight for many months until the Russia/Ukraine war is resolved.  But, we can survive.  The only situation that keeps me up at night is the loss of a major US refinery.  We have absolutely no room for error in our refining capacity.  We need more refineries in the US, not less.  But that will never happen.  Until we can rely on imports again from other countries, the refined market will be right.  But, marketers like myself have worked through the constantly changing industry dynamics and we are making pivots in order to be prepared.  I am confident that supplies will get to where they need to be as long as the government and the news continue to work with the industry and not against.

Propane prices are still holding steady.  Propane continues to be the most valuable form of heating.  Propane is trading under 50% value to crude when historicals are closer to 60%.  Most of the loss in value comes from weak demand in petrochemical production.  We are starting to see news reports of petrochemical demand returning strong into the coming months which will push propane prices up by almost 10%.  So as I have been saying, please continue to take advantage of these lower than average prices, because when propane price moves higher, the move will be swift and not connected to other market conditions.

As always, if you have any questions, comments, or concerns, please feel free to give us a call.

Best regards,

Jon Crawford

Economic Recession or One-Trick Pony?

Good morning!

Crude prices experienced a bit of a seesaw ride this week but are looking to close a bit lower for the week.  The continued saga between supply/demand and which news headlines grips the markets played out again this week.  The UK continued its’ absolute economic mess with PM Truss resigning this week.  The UK has a long way to go to dig themselves out of a hole that was created in only six weeks.  The earnings reports this week were not stellar and many FED members called for rate hikes much higher than 4.75%.  Jeff Bezos made a post this week that it’s time to batten down the hatches.  Xi Jinping in China gave his speech to the CCP Congress this week and addressed his vision.  Many believe the vision includes the forceful unification of Taiwan.  However, there was movement to possibly loosen Covid quarantines for visitors prompting many to believe China wants to reopen to the world.  Although an “open China” would give strength to crude oil demand, the breadth of Pres Biden’s chip export ban is starting to become realized.  China will be crippled along with many other countries since TSMC and others can not fulfill the chip demand of the world.  The results could be devastating on world economic growth, hence cutting crude oil demand.  Although the US is building FABS, we will not have the capacity online in time to brunt the pain of the China chip export ban.  Many believe Biden’s act is a provocation to China, placing us now in conflict with both China and Russia.  With midterms coming, many are starting to grow tired of the Russian conflict and are wanting the US to force a path to resolution between Ukraine and Russia.  As the FED continues to raise interest rates, we will not be able to afford continued economic support in Ukraine and support our growing FAB infrastructure.  As a distraction to the main global conflicts on hand causing economic headwinds, Pres Biden announced another strategic reserve release of 15M barrels of  oil to counter the OPEC+ production cuts.  Although crude prices retreated on the news, I believe that poor economic data and world conflict news were the true causes of the price retreat.  Crude oil supply is only part of the issue.  Refining capacity is the larger issue at hand.  More crude oil in the market does not make more gasoline and diesel.  We are still experiencing decreases in national inventories of crude oil, gasoline, and diesel even though our rig counts and production levels are back to pre-pandemic level.  In addition, Pres Biden announced again that he would fill the strategic reserves at $80/barrel.  I completely disagree with the strategy.  If we truly fall into economic recession, the possibility of crude oil prices falling below $80 is very, very real.  Then the US is sitting on a ton of high-priced crude.  Also, when the US buys crude for the reserves, it takes the crude oil supplies off the tightly supplied market and causes prices to increase.  I believe that the government should focus on economic conditions at home and ending the conflict in Russia.  The government is not in the businesses of trading crude oil.  I am very concerned that the amount of government interference in the crude oil marketplace, coupled with decreasing reserves, is placing us in a dangerous and vulnerable position.

In local news, gasoline prices in the Chicago market finally eased from their insane differential spreads to our neighboring markets.  Diesel prices are also starting to fall due to economic headwinds and the harvest demand on the downslope.  I do believe that Pres Biden made moves the past week to try and lower prices prior to midterms.  The moves have been used by many previous presidents in the past. However, this time it’s dangerous with how tight our market is at home and abroad.  I do believe that you will see OPEC+ respond accordingly in November, and unfortunately OPEC+ has a lot more room to cut production than we have strategic reserves at home.  The US government needs to treat lightly going into the end of the year.

Propane prices have found support due to colder than normal weather, as well as a colder than normal forecast for the winter.  Although supplies are in good shape, the percentage value of propane price to crude oil price will start to narrow as demand kicks in.   I am more optimistic on propane supplies for the winter, but I am still pessimistic that these lower prices will not hold into December and January.  Unless crude oil prices completely collapse, propane prices are primed to go higher.

As always, if you have any questions, comments, or concerns, please feel free to give us a call.

Best regards,

Jon Crawford

Demand Destruction and the Strong Dollar Winning the Battle in the Marketplace

Good morning!

Happy Friday!  Well, after a week of digesting record proposed cuts by OPEC+, WTI crude prices have settled back below $90/barrel and heading towards $85/barrel.  The meltdown in the UK is giving further support to the US Dollar.  And in the United States, inflation continues to run hot which supports further aggressive FED rate hikes.  These rate hikes in turn give strength to the Dollar, which lowers crude prices because crude is traded based on the Dollar.  In addition to inflation data, the US seems to be continuing it’s trend towards recession.  Consumer spending is starting to show cracks and major retailers are trying to liquidate bloated inventories due to dropping demand.  In addition, crude oil inventories in the US experienced a massive build as well as gasoline inventories.  However, diesel inventories continue to drop on demand for the harvest and lower refining capacity.  I expect to see diesel prices continue to trade at major premiums through all of next year due to nationwide refining constraints.  The war in the Ukraine as well as OPEC+ production cuts have lost the battle this week for the eyes and ears of the markets.  But the volatility does not look to be going away anytime soon, so we’ll see who wins the eyes and ears of the markets next week!

In local markets, the bloated differentials on gasoline have subsided.  Therefore, I expect to see gasoline retail prices remain under $4/gallon.  Diesel price spreads have not changed much due to high diesel demand for harvest and continued refining constraints.  I could see diesel retail prices holding above $5/gallon next week.

Propane continues to show nice inventory builds.  We now have a decent supply going into winter.  However, that does not cover us for major Polar Vortex events or a prolonged winter.  But we are in better shape than last year.  Prices are moving around a little bit, but not much changing at retail due to such a value spread between propane price and crude oil price.  Basically, at first demand for propane, prices could jump by 10-15%.  For now, I highly recommend taking advantage of these lower prices holding into winter.

As always, if you have any question, comments, or concerns, please feel free to give us a call.

Best regards,

Jon Crawford

Breaking Up Is Hard To Do

Happy start to October!

Well, this week has been absolutely ugly for the crude oil markets.  On October 5th, OPEC+ met in person for the first time since 2020.  Everyone knew that the meeting was going to be important because OPEC+ wanted all ministers to vote in person for a more personal and intense negotiation.  Crude oil prices started out the week trading much higher based on announcements prior to the meeting of a 1M barrel per day cut to crude oil production.  Saudi Arabia and Russia were going to bare the brunt of the cuts.  Both countries were signaling that the United States’ involvement with the war in Ukraine, raising FED rates to strengthen the dollar, as well as weaponizing the Strategic Petroleum Reserves were not going to be tolerated anymore.  Biden and his crew worked tirelessly behind the scenes with Saudi Arabia and others to try and lower the amount of the proposed cut.  Saudi Arabia has been a long-time but difficult ally of the United States and Europe, so many believed that Saudi Arabia’s actions could draw a line in the sand on the future of the relationship between the countries.  Well, Wednesday turned out to be a double-whammy.  Not only did Saudi Arabia side with Russia to cut production, but they surprised the markets with a 2M barrel per day cut to crude oil production!  Then a few hours later, the EIA released their United States inventory report showing major drawdowns in gasoline and diesel inventories, as well crude oil inventories.  The surprise from OPEC+ and the inventory report shot WTI prices close to $90/barrel.  WTI is now going to be locked in a range of about $85-95/barrel for the foreseeable future.  Biden announced a 10M barrel Strategic Reserve release, but the actions didn’t and won’t move the needle.  The markets know that our reserves are below 50% and we don’t have the spare capacity to be playing with our reserves anymore.  But there is a proposed law called NOPEC that is floating around Congress.  The bill would name OPEC as a price fixing cartel and sue countries, particularly Saudi Arabia, for damages caused by their market manipulating actions.  In the past, the bill was tabled because we needed Saudi Arabia.  In fact, we allowed Saudi Aramco to invest in the US equities markets, real estate, etc.  If NOPEC was passed, the government might be able to sue Saudi Arabia and seek damages by seizing all their assets in the American markets, which could devastate Saudi Arabia’s long-term plans of diversification from oil.  I believe there is a consensus growing in the US that Saudi Arabia sided with Russia and is no longer our ally.  So we must respond and break up our relationship.  Although Saudi Arabia sent a message of strong-arming the West, the outcome could come back to bite harder than Saudi Arabia might have anticipated.  Not only would penalties be enforced, but all arms sales to Saudi Arabia would be halted.  As they say, “money talks”.  The process would be painful, but looking at the current economic situation, the best time might be now to rip off the Band-Aid.  Although prices for fuel are going to go much higher, the long term consequences of this week’s actions are just beginning.

In local news, record high differentials in gasoline spot-market-spreads eased.  So although crude prices rocketed higher, gasoline prices eased a bit from the record highs last week.  Gasoline retail will still remain near the $4/gallon mark.  But diesel prices went on an absolute rip this week.  Diesel cost went up 90 cents/gal since October 1st.  We will see diesel prices over $5/gallon again at the pump any day now.  As harvest is just getting into full swing, the record jump in cost could not have come at a worse time.  I expect to see these prices hold for the coming months unless economic data starts to get really ugly and the FED continues to raise rates aggressively.

Propane prices have started to come up from their lows.  Propane has been fairly stable the past two months.  But as crude prices are now rockin’ higher, the propane trade is starting to come alive.  Based on the percentage spread of propane price to crude oil price, propane is primed for some big moves higher.  As demand starts to ramp up for propane, and if crude prices remain at the current levels, we could see some big moves higher in propane prices.  If you have not done so, we highly recommend filling your tank at this time.

As always, if you have any questions, comments, or concerns, please feel free to give us a call.

Best regards,

Jon Crawford