Too Much, Too Late?

Good morning!

I hope this message finds you all well on this snowy and cold morning in Wisconsin.  WTI crude prices are closing below $100/barrel for the week after hitting highs just weeks ago.  The big news this week was an announcement by the IEA to release an additional 160M barrels of oil from the world strategic reserves.  At first, the market sold off on the news but recovered within a day.  I believe the reason is because all the actions being taken to curtail rising energy costs are too much, too late.  I know that sounds a bit counterintuitive, but the market is starting to understand the bigger picture that OPEC+ is behaving within their production quotas.  And OPEC+ seems to remember what happened in 2014.  They are NOT going to be stuck holding the bag.  The more the world pushes the reserve releases, the firmer they are holding to their quotas.  And the world will run out of reserves before OPEC+ runs out of oil.  So we are in this game of “catch-up” and “reaction” that is not working as expected.  Even rising interest rates and discussion of possible recession are not affecting crude prices as they have in the past.  I really believe that until there is a steady, predictable increase to world crude production, the world will be stuck with higher oil prices.  If we do go into a full-blown recession and interest rates jump 3%, we could then start to see some downward pressure.  However, if OPEC+ responds with production cuts to these events, possibly prices could be buoyed at higher rates.  Even China continuing to shutdown the largest city in the world didn’t lower crude prices that much!  Now, although crude prices are much lower, some have stated that retail prices have not fallen as much.  The reason is that cost for gasoline and diesel is at a positive arbitrage to crude prices.  We continue to export refined products dealing with worldwide supply issues surrounding the war and bans on Russian products.  The United States is at 92% refining utilization which is very healthy, but our exports are offsetting the builds in diesel reserves that we desperately need.  The US is at the lowest levels of diesel fuel inventory in many, many years.  And we are now in an economy that is more dependent on diesel due to our spending patterns.  As inflation continues to skyrocket, consumers are already stating that they are going to cut back on “going out” which means they will just buy more stuff at home.  The behavior puts more pressure on mid-stream logistics which is mostly fueled by diesel.  Whereas the “going out” consumer behaviors are fueled more with gasoline.  Regardless, I believe the West is reacting too much, too late to make a big difference in the near term.

Gasoline and diesel retail prices have eased a little bit at the pump.  Gasoline retail prices are pushing closer to $3.49/gallon and diesel is pushing down towards $4.49/gallon.  The spread between gasoline and diesel is almost $1.00/gallon at the pump!  The reason is due to the very low national inventories of diesel.  As I have been writing, consumers need to watch the price of diesel.  If diesel stays high as it is, inflation will remain red-hot because diesel prices are connected to everything we do.  In my opinion, for what it matters, we need diesel prices to drop $1/gallon in order to have a shot at a soft landing coming down from high inflation with rising interest rates.

Propane prices are also slowly easing with the recent drop in crude prices.  Although propane cost is not dropping as much as expected due to very low national inventories and a winter that never seems to end.  The good news is that I see a better chance of having propane contracts for next season at lower prices than I anticipated a month ago.  We will be sending out information on our contracts for next season probably near the end of May or the first part of June.   Please stay tuned for more info.  In the meantime, if you contracted with us for the current heating season, please make sure to call us if you have remaining contract gallons.  Your current contracted gallons expire at the end of April which is fast approaching!

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

Best regards,

Jon Crawford

Posted in Uncategorized and tagged , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , .