I Hope You Are Sitting Down

Good morning!

I would like to say “Happy Friday”, but there is not a lot of happy news in this week’s update!  I’ve been writing for weeks that gasoline prices were primed to breakout higher in due to high demand and lower supply, but now diesel is hitching a ride to the moon along with gasoline!  The EU announced this week that they will be banning basically 90% of all petroleum imports from Russia.  The announcement sent shockwaves through the already very tight crude market.  WTI crude prices soared past $115/barrel, pushing gasoline and diesel prices over 30 cents/gallon higher.  OPEC is starting to see some cracks in their strategy.  The defacto leader of OPEC, Saudi Arabia, floated ideas of kicking out Russia from OPEC+ due to supply chain disruptions and unpredictability with quota production.  In addition to kicking out Russia, Saudi Arabia sent a calming message to the West that they will not let prices run away.  Many banks have been calling for $135-150/barrel WTI crude.  Saudi Arabia said those prices are unsustainable and they do not want to cause an economic collapse.  OPEC+ agreed to increase production quotas from 400k barrels/month to over 600k barrels/month for the next two months.  However, the world markets are skeptical that OPEC+ can deliver.  The US is continuing to pour out crude oil exports, along with diesel fuel to Europe.  There were major draws on our national petroleum inventories last week.  Quite frankly, I’m getting a bit concerned that we are not leaving ourselves enough wiggle room on diesel supply in America.  We only have 5% spare refining capacity left in the entire US!  The East Coast is in major trouble, and the Midwest / Gulf Coast are extremely tight.  The incentive for refineries to run is very strong.  But with all the exports going to Europe, we are just not able to get ahead on national inventories.  NOAA Weather is calling for a higher than normal hurricane season.  This could actually be a blessing in disguise for the Midwest.  Right now, Chicago refineries are shipping product to Nashville for East Coast deliveries, and down to the Gulf for exports.  In the past, the Gulf was the main refining source for the East of Rockies markets.  But over the last ten years, the Midwest has taken the refining crown from the Gulf Coast and is supplying more products to the  south.  Although hurricanes will shudder production, they will also shudder exports.  When the Gulf shuts down for hurricanes, demand also dies.  Therefore, hurricanes could actually give the Midwest a breather to catch up on diesel supplies going into the harvest.  There is no appetite for refiners to store barrels right now, so a lack of exports might give an opportunity for storage.  Although prices would increase, at least we would have spare capacity for the fall harvest.  As always, I do not see us getting out of the woods until the war in Russia is over.  I believe we are in for a very difficult summer and fall.  But the good news, is that I still see the energy markets starting to balance out in the first half of 2023.  The only scenario that allows the cooling of crude prices to come quicker is a world economic collapse.  Major banks are stating that the average consumer in the US has about 6 months of spending power left in the tank.  But if the prices of commodities stay hot, our consumer economy could start to contract faster than expected.  Any major economic contraction will start to pull down commodity prices.   Regardless, not much will change until after summer.

In local news, gasoline retail prices are moving closer and closer to $5/gallon.  In the RFG markets around Milwaukee, gasoline retail has already broken $5/gallon.  And I thought diesel was finally balanced out and going to move lower than gasoline retail, but just like that I was wrong.  Diesel retail prices have climbed back through $5/gallon and are now moving closer to $5.49/gallon!  The volatility of the energy markets is absolutely stunning and head-spinning right now.

The one bright spot in all this chaos is propane.  Propane prices continue to stay steady through the chaos.  Propane is now much cheaper to use for heat than natural gas and fuel oil.  Unlike natural gas and other refined products, we already know the maximum export capacity of propane in the US.  Therefore, we can do simple predictable math on the supply of propane in our country.  As crude harvesting and refining capacity continue to run red-hot, the byproduct of each process is the production of propane.  Propane inventories are now higher than they were at this point last year.  Now, we don’t want to be complacent.  We had very little corn drying demand last year.  But with the late planting season this year, corn drying demand could be very high.  We are still too early to predict, so we must be cautious.  For now, propane prices are at their lowest in six months.  If you have not ordered a summer fill, we highly recommend that you do so.  Contracts for next winter season will be released probably near the end of June.

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

Best regards,

Jon Crawford

 

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