Good afternoon,
I hope this message finds everyone safe and well. The past five days have been the craziest trading days I have experienced since the run-up in price of 2008. Since March, crude producers and refiners in America ceased to stop production of product. I think many felt that something would give in the coronavirus pandemic, OPEC would save the day, or Trump would purchase a massive amount of products for the US Reserves. Unfortunately, none of these events came into play and by the end of April, many traders were starting to hold paper contracts for May with nowhere to sell the product. I wrote last week that strange things might happen with expiration of the May futures contract. I don’t think anyone thought we would experience what happened. The day before the expiration of the contract, a ton of May delivery contracts were sitting out there with no home for storage. As the contract price of WTI collapsed, I thought, “will the contract go negative for the first time in history?”. Well, it did. Once the contract went to -$0.03/barrel, I took a snap shot on my phone to mark the occasion. But then the contract went to -$0.63, then -$1.44, then -$2.56, then $-5.22, all the way to -$38.46/barrel! The WTI contract has never traded negative since the beginning in 1983. What this means, is that any trader holding May crude contracts was going to have to PAY someone $38.46/barrel to take the crude. The losses were unimaginable. But in my opinion, totally explainable and rational. American producers did not cut as fast as they needed to. For whatever reason, they gambled and lost. I believe these were all calculated business decisions that unfortunately needed to happen to force the industry to slow down. Once the June contract started, the market started to re-balance. And now on Friday, we are back to some sort of equilibrium. But don’t hold your breath. WTI crude prices are one large bad trade away from collapsing again. Until we see demand pick up in the country and the rest of the world, crude oil will experience the most volatile times in trading history.
In local news, last week I talked about not getting too used to gasoline retail prices under $1.00/gallon. Well, it’s over. Based on gasoline costs, by the end of next week, Wisconsin should be back above $1/gallon on gasoline. Gasoline prices shot up almost 30 cents this past week as the Chicago spot market gave up it’s differential advantage to the Group. Diesel retail prices remain low in our market, but Chicago differentials are cheap compared to the Group. So just like with gasoline, sometime in the next couple weeks, diesel costs will probably jump dramatically in our market.
Propane prices are continuing to rise since the lows hit in early March. I have been telling everyone that the time to fill your tank is now, not in the summer. If crude prices stay low, there will be very limited production of propane which is going to cause propane prices to rise even further. There is a possibility of supply reliability going into fall depending on how much production is cut in the US and Canada. For now, I suggest that everyone fill their tanks and wait for contract prices this summer. Do not fall into the trap that lower crude and gas/diesel prices mean cheaper propane is on the way this summer!
As always, if you have any questions, comments, or concerns, please feel free to give us a call.
Best regards,
Jon Crawford