Monthly Archives: March 2023

What A Difference A Couple of Weeks Make!

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Good morning!

Happy Friday!  There was no update last week as I was on vacation.  As I left for vacation, the US was facing a possible banking liquidity crisis.  Medium sized banks were failing, the world was panicking, depositors were moving funds to the major four banks or monetary safety investments, and the FED was not being clear on how they were going to stop the bleeding.  WTI crude prices fell to the lowest price in a over two years to $65/barrel.  Many investors believed the “black swan” event was happening.  Crude prices and the markets were going to collapse.  Not only did the market and crude prices not collapse, but the market ripped back to higher than it was before the banking crisis!  The FED offered a backstop to all depositors.  A relief rally took momentum and did not stop.  WTI crude prices went up in two weeks from $65/barrel to now $75/barrel in less than two weeks.  The stock market rallied higher as well.  The FED met this week and raised rates 25 basis points, and even the raise did not budge the market rally.  Although many bearish signs are in the works, including liquidity issues in the banking system, a commercial real estate bubble that’s about to burst, student loan debt payments resuming, and high inflation, the markets have all shrugged and moved on ahead.

In world news, the escalation between Ukraine and Russia continues.  Russia is claiming to move tactical nuclear warheads into Belarus and is pulling out of the New START nuclear treaty with the US.  The treaty is an agreement that US and Russia will announce nuclear testing to ensure that either country views a test as a true nuclear attack.  The US condemned the action by Russia which adds further tension that Russia could use a tactical nuclear weapon in Ukraine.  China brokered a deal between Saudi Arabia and Syria and is looking to broker a peace deal between Russia and Ukraine.  Zelensky said that he is also willing to meet with Xi Jinping.  China has been on a role as a “peace maker” which has historically been the role of the United States.  Overall, the actions from China in the past two weeks are displaying signs of a super power that can offer peace treaty guidance to complex foreign relations.  The work of China is weakening the influence of the US around the globe.  The US also sold nuclear submarines to Australia further escalating tensions with China, convinced Japan to limit chip exports to China, and welcomed the President of Taiwan to the US for a visit.  Also, in response to China brokering a peace deal between Saudi Arabia and Syria, Saudi Arabia is funding the construction of a large refinery in China to guarantee an energy relationship for the future.  The US is losing clout in the world quickly.  Therefore, the global tensions in the world are adding a “risk-on” premium to the price of crude oil.  And the cherry on top, Finland looks to be approved for NATO membership next week.  The escalations in world tensions connected to the US continue to grow.  And instead, tensions with China and other countries continue to move towards peace and trade relations.  From a 20,000 foot view, the US has a lot of work to do.  In addition, OPEC is holding firm to keeping production cuts in place.  Iraq lost 450k barrels per day of exports this week, but should be back online within a month.  The support level of WTI at $65/barrel seems to be very strong.  The US is working globally now as a major exporter and I believe that the market has set a floor that WTI prices under $65/barrel is not sustainable.  Although we could see another pull back in prices, I just don’t see WTI crude prices falling below $65/barrel anytime this year.

In local news, crack spreads for refiners got hammered this week as refiners continue to push diesel production over gasoline.  But with a potential recession looming in the US, there is only so much diesel that can be exported.  Therefore, diesel prices have relaxed a bit due to the crack spread collapse.  However, gasoline prices have continued to trend higher due to lowering production of gasoline.  Refiners have decided that the world market appetite for diesel is much stronger than gasoline.  And the potential for lower gasoline demand is on the table for the summer.  Therefore, refiners would rather make money on gasoline locally and use the world price export arbitrage on diesel to their advantage.  I do not expect to see gasoline prices be low this summer, even with potential weaker demand.  Diesel prices could hold a bit lower if we ride into recession.

Propane prices have found support as WTI crude price increased.  When WTI crude prices dropped to $65/barrel for a brief moment, propane prices did not drop that much.  Propane has been trading on a historically low percentage value to crude prices.  Therefore, crude prices really need to drop below $65/barrel to cause a major drop in propane prices.  In addition, due to the mild winter, propane inventories are very high across.  But refiners are sending the message loud and clear that a floor for production is in place for next winter.  I believe we will see cheaper prices in the summer, but a fairly decent premium between summer fill and next season’s heating contract price.  Although I firmly believe next heating season’s contract price will be lower than next year, I would not be surprised to see a 15-20 cent premium between summer fill price and next season’s contract price.  I will be urging everyone to top off their tanks this summer and contract for next season, even at a premium.  The reason is the value percentage of propane price compared to crude oil price.  Crude oil prices have a long way to drop before propane price will truly affected.  And I just don’t see refiners giving up margin as the world continues to push the alternative energy transformation agenda and world economics continue to be volatile.

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

Best regards,

Jon Crawford

The Markets Have Spoken

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Happy Friday!

Well, I don’t think I need to talk too much about the bank failures and bank runs that have occurred across the US and Europe.  I think the main media did enough non-stop coverage on those topics!  🙂  The contagion fears and misinformation being discussed by major news sources did not help this week.  There were no risky bets by Venture Capital that caused these banks to fail.  The banks made poor decisions such as investing in crypto, long term bonds, and mortgage backed securities.  The FED raising rates at an incredible pace caused these banks to be pinched, along with rates increasing in Europe.  The money pouring in from major banks as well as a FED backstop will not affect the American taxpayer.  These are not bailouts.  I believe we are doing the right action and letting the bank executives, board members, and shareholder lose their money.  Not the depositors.  The FDIC insurance of $250k is absurdly low.  I previously stated that most of this fear would blow over in a week or two, and that has already happened.  The plan in place should stop any major collapse and the big banks came to the rescue.  The fear of economic collapse caused WTI crude prices to collapse.  I have called a bottom at $65/barrel on WTI and then a catastrophic bottom at $59/barrel.  Well, even with the massive selloff, WTI could not break through the $65/barrel price.  The crude oil market is sending a message.  Energy companies must continue to make money and $65/barrel seems to be the minimum price to continue profitability in operations, investment in alternative energies, and stock buybacks.  Major oil companies need to continue to be profitable as they are investing heavily in the alternative energy space.  The majority of all major alternative energy investments are coming from oil companies around the globe.  Now, let’s take a quick step back.  Will Exxon/Mobil be held accountable like the cigarette companies for covering up their knowledge of global warming that they knew about through research 20 years ago and covered up?… Yes.  Will bank executives and shareholders who sold positions two days prior to the current collapse be forced to return money that will go to back to teh FED?… Yes.  The US government and all agencies have made it very clear that these companies will still be held liable.  The lawsuits and claw-backs will take time.  Unfortunately, just like the the Big Banks that are “too big to fail”, the major oil companies are still the fastest vehicle to implement alternative energy projects such as windmills, solar, and hydrogen across the United States and the rest of the globe.  If oil prices fall too low, American citizens and other customers around the world lose interest in alternative energy because the cost to fill up their cars and heat their homes puts more cash flow into their pockets.  The incentives must remain in order to invest in alternative energy sources, and I believe WTI crude oil must stay at or above $65/barrel to achieve our alternative energy goals.  In addition, if WTI crude prices fell below $65/barrel, I believe that American oil companies as well as OPEC would announce production cuts immediately in order to prop up price.  For the first time ever, American oil companies and OPEC are in sync with incentives.  Market share is no longer the main incentive and driver of profitability.  Pivoting into new business ventures outside of oil is driving the economic engine of all oil producing companies and nations.  Although I believe solar will be the major alternative energy producer for electricity, I am very long on liquid hydrogen in the auto and heavy duty trucking industry.  I believe liquid hydrogen will be much easier to scale and maintain than electric vehicles due to the reliability/availability of rare earth metals and a supply chain that is so difficult to manage worldwide.  Liquid hydrogen can be produced locally in each country and the retooling of factories to pivot towards liquid hydrogen is much easier than electric vehicles.  Lastly, I do believe we are skipping along the bottom of crude oil prices and there are some value hedging opportunities.

In local news, Chicago spot prices were all over the map.  After seeing some market price erosion, gasoline prices firmed up due to the continuing change to summer RVP spec.  Diesel prices fell but ended the week firming up as crack-spreads shook off the price collapse in crude oil prices and traded higher.  I don’t expect to see too many changes on retail prices due to the whipsaw market moves.

Propane spot prices continue their steady trend, and future prices did not fall as much as expected due to the current massive value of propane price compared to crude price.  We are well below the historical average.  Therefore, I believe that future prices of propane will not move much, even if WTI crude oil price stays around $60-65/barrel.  However, because of large levels of propane inventory in our national storage due to a dud of a winter, I believe suppliers will be aggressive on getting rid of propane this summer to make room for the winter storage based on future allocations.  Therefore, I could see the scenario where summer fills are 10-15 cents, maybe even 20 cents/gal, cheaper than the contract price for propane heating season in 2023-2024.  However, next year’s heating contracts will be cheaper than this year which is incredible in a time of high inflation.

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

Best regards,

Jon Crawford

The Power of the FED

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Good afternoon!

I’m writing my update a day early, but once again, I don’t see much changing going into Friday.  As I wrote last week, the market and crude oil prices were grasping at straws to keep a nice rally going.  But I pointed out the true economic cracks in the market reasoning.  Remember, markets are not the economy, nor are they rationale.  Well, this week, the power of the FED was on full display.  Powell testified before Congress and did not mix words.  Even when Senators drilled him and threw anger his way, Powell stood his ground and now said that a half-point is on the table and he will not stop until inflation breaks.  Powell does not see the economy cooling as others are describing.  In addition, China has lowered their GDP forecast and the EU seems to be living in the alternate universe that America was living in the past couple of months.  The EU believes a “soft landing” is possible, but the cracks are showing there as well, just as they did in the US.  In addition, Russia has found plenty of buyers for crude.  Although Russian exports are down, America and Venezuela are filling the gaps.  And we must always remember there is a ton of spare capacity in OPEC.  Natural gas exports continue to run hard from America to Germany and America looks to be able to fulfill most of the gap from the loss of the Nord Stream.  Crude oil production is continuing to try and grow, and refineries are coming back online this year that were closed last year due to either accident or major upgrades.  President Biden has made it clear that the US must continue to invest in crude oil and finished products to bridge America and the world to cleaner fuels.  Crude prices sold off almost 10% on the news this week.  Every week is a push and pull.  WTI crude prices are now moving closer to $70/barrel after testing $80/barrel last week.  I expect crude will continue to trade in the $70-80/barrel range until summer.  If summer demand turns out to be a dud, and Europe slows down, crude oil prices could really nose dive.  But if a nose dive starts to happen, OPEC will cut production to keep the bottom from falling out.  So for now, we wait and see.

In local news, gasoline retail prices rose as the market converts to summer gasoline vapor pressure.  And with summer demand projecting to be lower than last year, refineries are making more diesel than gasoline.  Diesel is in much greater demand around the world.  Therefore refiners can make less gasoline and keep the prices of gasoline higher, all while making better profits on diesel abroad.  I think gasoline will hold around the $3/gallon area in Wisconsin and diesel prices could start to hit the $3.49/gallon on retail if the selloff continues and the Midwest refineries scheduled to open come back online.

Propane continues to build in national inventory and when the winter contract season has completed, I expect to see retail prices drop.  As of now, America has almost 40% more propane in inventory than last year!  I do think summer fill prices will be attractive.  However, I do see a potential for a slight premium on winter contracts over summer fill pricing due to suppliers trying to move as much gas out of the caverns so the country does not run out of storage.  For now, I think the worst of winter is behind us and now we wait and see what summer brings!

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

Best regards,

Jon Crawford

Are Crude Oil Prices Grasping At Straws?

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Good morning!

Happy Friday! Discussion of crude oil prices was fairly quiet this week.  WTI crude traded very sideways and seems to want and try and hit $80/barrel again.  I feel like crude oil prices are grasping at straws to hang on above $70/barrel.  The only really bullish news is that China is reopening and demand will be strong.  However, as China continues to work with Russia, China will import a lot of oil from Russia, therefore not disturbing the overall supply/demand at a catastrophic level.  Plus, OPEC has a lot of spare production capacity and the US continues to increase production at almost pre-pandemic levels.  The economy in the US and around the globe seems to be riding at a peak.  I really fell that eventually the consumer will have to throw in the towel.  Car payments on average are above $1,000 per month with two extra years added onto the loans.  The service industry continues to inflate prices.  Orders from China are starting to decline.  Home mortgage applications dropped to the lowest level in over 28 years as interest rates hit 7%.  Eventually, the consumer will tighten and there just won’t be enough jobs available.  Once the service industry starts to cut employees a bit, look out.  Now, the FED and the ECB are talking about whether to increase rates at a slower pace or increase rates at a greater pace .  However, they are not talking about stopping.  So the news is positive for the markets based on the possibility of slowing rates, but the markets are not the economy.  In addition to all the economic data, the war in Ukraine is such a wild card.  Who knows what will happen there.  All I know is that I do not see OPEC, especially Saudi Arabia, allowing crude oil prices to drop below $60/barrel, even in a recession.  I also don’t see OPEC allowing prices to trade much above $80/barrel.  I see crude prices being very choppy this year with more potential to rise at the end of the year only if Europe and the US economies survive the economic pain as China, India, and Vietnam ramp up economic production.

In local news, gasoline retail prices rose along with diesel.  Refiners are now having to make 13.5 RVP (which is summer gasoline vapor pressure versus much lower in the winter).  Gasoline prices usually climb higher into summer because of the increased cost to produce the product.  However, when looking at the crack spreads on a barrel of oil, I believe refiners are looking to make more diesel than gasoline this summer.  From what I can see, refiners are seeing a drop in gasoline demand going into the summer.  And the possibility of a lower demand gasoline summer means that refiners will raise prices in order to make up the lost volume, rather than compete for market-share.  Refining companies have all become very dependents on higher margin returns in order to pivot into renewable energies.  In addition, the world market for diesel is still very strong and refiners can move diesel barrels overseas at a nice premium.  So why would a refiner produce gasoline which is dropping in demand at home, when diesel is in higher demand at home and abroad?  Even if the summer ends up being a dud for travel, I still see gasoline prices being higher than average.

Propane is holding steady into the end of the winter.  So far, the winter has been 3% warmer than last winter.  Propane demand at home and abroad has been lower as well.  As customers look to save money, thermostats get lowered and alternative heating sources get added.  We are also experiencing customers paying bills with two credit cards.  All of the aforementioned items are combining to push propane inventories over 30% higher than last year at this time!  I expect to see rack prices drop this summer as suppliers and retailers compete for allocation in an oversupplied market.  However, I still expect to see the average of 10-15 cent spread between summer fill price and next season’s contracts.  Propane rarely trades in backwardation (when future prices are lower than spot price) when going into the upcoming year .  The reason for the premium is that no one can predict the next winter.  Propane prices trading two to three years out will go into backwardation, but those prices are more of a hedge bet and need to be evaluated on past historical data and value to crude.  As we approach the end of winter, please make sure to keep your driveway plowed/salted, tree branches trimmed over driveways, and a clear path to your propane tank to ensure a safe and efficient delivery.

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

Best regards,

Jon Crawford