Economic Recession or One-Trick Pony?

Good morning!

Crude prices experienced a bit of a seesaw ride this week but are looking to close a bit lower for the week.  The continued saga between supply/demand and which news headlines grips the markets played out again this week.  The UK continued its’ absolute economic mess with PM Truss resigning this week.  The UK has a long way to go to dig themselves out of a hole that was created in only six weeks.  The earnings reports this week were not stellar and many FED members called for rate hikes much higher than 4.75%.  Jeff Bezos made a post this week that it’s time to batten down the hatches.  Xi Jinping in China gave his speech to the CCP Congress this week and addressed his vision.  Many believe the vision includes the forceful unification of Taiwan.  However, there was movement to possibly loosen Covid quarantines for visitors prompting many to believe China wants to reopen to the world.  Although an “open China” would give strength to crude oil demand, the breadth of Pres Biden’s chip export ban is starting to become realized.  China will be crippled along with many other countries since TSMC and others can not fulfill the chip demand of the world.  The results could be devastating on world economic growth, hence cutting crude oil demand.  Although the US is building FABS, we will not have the capacity online in time to brunt the pain of the China chip export ban.  Many believe Biden’s act is a provocation to China, placing us now in conflict with both China and Russia.  With midterms coming, many are starting to grow tired of the Russian conflict and are wanting the US to force a path to resolution between Ukraine and Russia.  As the FED continues to raise interest rates, we will not be able to afford continued economic support in Ukraine and support our growing FAB infrastructure.  As a distraction to the main global conflicts on hand causing economic headwinds, Pres Biden announced another strategic reserve release of 15M barrels of  oil to counter the OPEC+ production cuts.  Although crude prices retreated on the news, I believe that poor economic data and world conflict news were the true causes of the price retreat.  Crude oil supply is only part of the issue.  Refining capacity is the larger issue at hand.  More crude oil in the market does not make more gasoline and diesel.  We are still experiencing decreases in national inventories of crude oil, gasoline, and diesel even though our rig counts and production levels are back to pre-pandemic level.  In addition, Pres Biden announced again that he would fill the strategic reserves at $80/barrel.  I completely disagree with the strategy.  If we truly fall into economic recession, the possibility of crude oil prices falling below $80 is very, very real.  Then the US is sitting on a ton of high-priced crude.  Also, when the US buys crude for the reserves, it takes the crude oil supplies off the tightly supplied market and causes prices to increase.  I believe that the government should focus on economic conditions at home and ending the conflict in Russia.  The government is not in the businesses of trading crude oil.  I am very concerned that the amount of government interference in the crude oil marketplace, coupled with decreasing reserves, is placing us in a dangerous and vulnerable position.

In local news, gasoline prices in the Chicago market finally eased from their insane differential spreads to our neighboring markets.  Diesel prices are also starting to fall due to economic headwinds and the harvest demand on the downslope.  I do believe that Pres Biden made moves the past week to try and lower prices prior to midterms.  The moves have been used by many previous presidents in the past. However, this time it’s dangerous with how tight our market is at home and abroad.  I do believe that you will see OPEC+ respond accordingly in November, and unfortunately OPEC+ has a lot more room to cut production than we have strategic reserves at home.  The US government needs to treat lightly going into the end of the year.

Propane prices have found support due to colder than normal weather, as well as a colder than normal forecast for the winter.  Although supplies are in good shape, the percentage value of propane price to crude oil price will start to narrow as demand kicks in.   I am more optimistic on propane supplies for the winter, but I am still pessimistic that these lower prices will not hold into December and January.  Unless crude oil prices completely collapse, propane prices are primed to go higher.

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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