Good morning,
Happy Friday. There is SO much going on in the world right now, I’m just going to dive right in. So be patient. My post today might jump around a lot. Prices of crude oil are rocketing higher on fears of oil disruptions from Russia. The world is betting on embargos of Russian oil and no ability to plug the deficit. I would like to paint you a different picture. Russia exports about 5M barrels of oil/day. Any embargos or sanctions will push all Russian oil sales to China and India. If China and India purchase more from Russia, the oil that was going to those countries can go somewhere else. Basically, there will NOT be a 5M barrel/day deficit on Russian oil sanctions. One MAJOR event that is not being discussed is the execution of the new Iran nuclear deal. China is pushing hard for the deal to get done. Why? Because if the deal gets done, 1-2M barrels/day of oil will flow into the markets by the end of April, alleviating some of the price shock and taking pressure off China to act on Russia. Also, China does NOT want high oil prices because their economy is leveraged on the world buying goods from them. And continued inflation of crude oil trickles through every section of a goods-purchasing based economies. The Iran nuclear deal is looking to be signed by the end of next week. If that happens, their could be a $10/barrel drop in crude.
OPEC also met this week and decided NOT to increase production quotas beyond 400k barrels/day. Many were thinking Saudi Arabia would increase 1M barrels/day themselves just to show the world that they are needed and once again the heroes. But they did not do that. Saudi Arabia can increase production 1-2M barrels/day easily within two months. So why did they not do that? The Iran deal is on the horizon. Iran and Saudi Arabia do not like each other and continue to fight a proxy war in Yemen. If Saudi Arabia announced a 1M barrel/day increase this week and shook the market, and then the Iran deal came on next week, the market could overreact and tumble. Saudi Arabia wants to bring the prices down slowly and steady. But Saudi Arabia does care about Iran going after their customers. So Saudi Arabia is waiting. If Iran signs the deal, the markets will relax. But then in April, Saudi Arabia will see how much they can increase to counter Iran without throwing the market into a freefall.
I’m sure many of you have read about calls from countries, including the US, to stop buying Russian crude. I know that sounds very straight forward and makes sense. Why should we be giving money to the enemy invading a peaceful nation? But I believe we should not embargo Russian crude oil. If we stop buying Russian crude, Russia will sell the crude to China or India. The embargo in the US will do nothing to hurt Russia economically. If anything, it would HELP Russia make more money and profit on war. If we enact an embargo, the markets will panic further and crude prices will rise. Russia will then be able to sell the same amount of oil or even less at HIGHER prices to customers. We should be looking at all options to LOWER the price of crude oil as quickly as possible, NOT inflate crude oil prices.
This week the world announced a strategic release of 60M barrels of crude oil from reserves. Some are saying we should be keeping our reserves high because of tight production. I disagree. I do not see long-term production problems with crude oil. I think that the world should be looking at more aggressive long-term strategic releases and not quick floods. I think a strategy of saying they are prepared to release 15M barrels/month for the next six months would have a much better effect than the approach they are taking. Plus countries can strike deals to replenish inventories over the coming years. And, at this strategy, we would not go below 50% of our world reserve capacity.
As far as the US production and reserves go, I got to thinking about the Keystone pipeline. As you might know, I have been against the Keystone pipeline because the pipeline moves Canadian Tar Sand crude down to the Gulf of Mexico where refineries are unable to use the crude. The crude will be exported out into the world market. Basically, the US is a giant lease-holder for the Canadian oil companies. Canada already has direct pipeline access to Midwest refineries that are tooled for Canadian crude. The main reason I have been against the pipeline is the lack of financial incentives for the US. However, I would not be opposed to exploring using the Keystone pipeline as a mechanism for replenishing our Strategic Reserves. We could work an index deal to purchase crude from Canada and replenish reserves directly when needed. Then we can release and sell that oil on the open export market. We do not need to store crude oil that can only be refined in the US alone. We have more than enough oil and harvesting capacity to take care of ourselves in a major jam. Then use the strategic reserves as an energy tool like Saudi Arabia does. We would gain further energy independence and marketability around the world, all while partnering with our neighbor to the north.
That was a lot… Next week will be a big deal. Right now our fingers need to be crossed that the Iran nuclear deal gets signed next week and that Ukraine/Russia agree to a ceasefire. Until then, we will be sheddin’ cash into our fuel tanks, heating bills, and shipping costs.
In local news, gasoline retail prices jumped to over $3.50/gallon and I expect this to go up further. Diesel retail price jumped to over $4.00/gallon and will start to approach $4.50/gallon really soon. If we thought trucking and supply chains were issues before, just wait and see what happens if these high fuel costs hold longer than two months!
Propane price has moved higher along with crude. Although the price has not traded at the same multiple of heating oil. Right now, propane is still about 10% cheaper than heating oil at retail price based on BTU’s. The only silver lining on propane is that production looks to be strong at these current crude oil prices. So hopefully propane producers can rebuild inventories at a good clip this summer and bring lower prices for later in the year.
As always, if you have any questions, comments, or concerns, please feel free to give us a call.
Best regards,
Jon Crawford