Happy start to October!
Well, this week has been absolutely ugly for the crude oil markets. On October 5th, OPEC+ met in person for the first time since 2020. Everyone knew that the meeting was going to be important because OPEC+ wanted all ministers to vote in person for a more personal and intense negotiation. Crude oil prices started out the week trading much higher based on announcements prior to the meeting of a 1M barrel per day cut to crude oil production. Saudi Arabia and Russia were going to bare the brunt of the cuts. Both countries were signaling that the United States’ involvement with the war in Ukraine, raising FED rates to strengthen the dollar, as well as weaponizing the Strategic Petroleum Reserves were not going to be tolerated anymore. Biden and his crew worked tirelessly behind the scenes with Saudi Arabia and others to try and lower the amount of the proposed cut. Saudi Arabia has been a long-time but difficult ally of the United States and Europe, so many believed that Saudi Arabia’s actions could draw a line in the sand on the future of the relationship between the countries. Well, Wednesday turned out to be a double-whammy. Not only did Saudi Arabia side with Russia to cut production, but they surprised the markets with a 2M barrel per day cut to crude oil production! Then a few hours later, the EIA released their United States inventory report showing major drawdowns in gasoline and diesel inventories, as well crude oil inventories. The surprise from OPEC+ and the inventory report shot WTI prices close to $90/barrel. WTI is now going to be locked in a range of about $85-95/barrel for the foreseeable future. Biden announced a 10M barrel Strategic Reserve release, but the actions didn’t and won’t move the needle. The markets know that our reserves are below 50% and we don’t have the spare capacity to be playing with our reserves anymore. But there is a proposed law called NOPEC that is floating around Congress. The bill would name OPEC as a price fixing cartel and sue countries, particularly Saudi Arabia, for damages caused by their market manipulating actions. In the past, the bill was tabled because we needed Saudi Arabia. In fact, we allowed Saudi Aramco to invest in the US equities markets, real estate, etc. If NOPEC was passed, the government might be able to sue Saudi Arabia and seek damages by seizing all their assets in the American markets, which could devastate Saudi Arabia’s long-term plans of diversification from oil. I believe there is a consensus growing in the US that Saudi Arabia sided with Russia and is no longer our ally. So we must respond and break up our relationship. Although Saudi Arabia sent a message of strong-arming the West, the outcome could come back to bite harder than Saudi Arabia might have anticipated. Not only would penalties be enforced, but all arms sales to Saudi Arabia would be halted. As they say, “money talks”. The process would be painful, but looking at the current economic situation, the best time might be now to rip off the Band-Aid. Although prices for fuel are going to go much higher, the long term consequences of this week’s actions are just beginning.
In local news, record high differentials in gasoline spot-market-spreads eased. So although crude prices rocketed higher, gasoline prices eased a bit from the record highs last week. Gasoline retail will still remain near the $4/gallon mark. But diesel prices went on an absolute rip this week. Diesel cost went up 90 cents/gal since October 1st. We will see diesel prices over $5/gallon again at the pump any day now. As harvest is just getting into full swing, the record jump in cost could not have come at a worse time. I expect to see these prices hold for the coming months unless economic data starts to get really ugly and the FED continues to raise rates aggressively.
Propane prices have started to come up from their lows. Propane has been fairly stable the past two months. But as crude prices are now rockin’ higher, the propane trade is starting to come alive. Based on the percentage spread of propane price to crude oil price, propane is primed for some big moves higher. As demand starts to ramp up for propane, and if crude prices remain at the current levels, we could see some big moves higher in propane prices. If you have not done so, we highly recommend filling your tank at this time.
As always, if you have any questions, comments, or concerns, please feel free to give us a call.
Best regards,
Jon Crawford