Be Very, Very Quiet…I’m Hunting For Diesel

Good morning!

Happy Friday!  The crude market was fairly stable this week.  Although crude prices finished a bit higher than last week, WTI has yet been unable to break back above $90/barrel.  Although the crude market is tight, the continued threat of demand destruction is weighing heavy.  China reported slower growth and is facing some incredible headwinds economically.  The middle class in China is very large now and not willing to work the jobs that propelled the country to become the economic powerhouse that they are today.  We could see continued growth in demand from India and Vietnam as labor rates are much lower in the developing countries compared to China.  However, when it comes to FABS for manufacturing chips and cards, the US is really positioning themselves to be a leader along with TSMC.  The good news for China/US relations came as a surprise this week when Xi Jinping announced that he would like to meet with Biden and develop a plan for the countries to work together.  After Xi Jinping’s speech earlier this week than seemed to be combative to the US, the softened tone and request for a meeting was a surprise and welcomed by the US.  Between a stronger separation but working together for common global goals, many are hoping China can pressure Russia into a peace talk if the US pressures Ukraine to the table as well.  If a peace deal could be reached in the Ukraine, the tight crude market would have some breathing room.  All economic data is pointing to a recession in the US.  Even BIG TECH is now not immune to the conditions.  Microsoft, Google, Amazon, Apple, and Meta all took a beating this week on slowing growth.  Home buying hit the slowest pace since the Great Recession, along with the highest mortgage rates in 20 years.  Although the US reported a surprise increase in GDP, the increase really came from exports and not internal organic economic growth.  As I always write, the devil is in the details.  We are now approaching the holiday season, so we will truly start to see the strength of the US retail economy soon.  I understand that much of this report seems not related to crude oil directly, but all of these situations are very important for future crude oil demand.  We will really know more of where the crude market is heading in 2023 by the end of 2022.  So much can still happen in the last two months of this year.  As far as crude production for the US is concerned, we are at pre-pandemic production and could surpass a new record in daily production by end of 2023.  Pres Biden continues to try and use the strategic reserve purchasing strategy to increase capex in the oil industry, but it’s not really needed at this time.  Pres Biden should wait and see if we go into recession.  If the US economy goes into deeper recession, that would be the time to start making oil reserve purchases to keep the oil industry at full capacity.  We would hate to see the oil industry start to cut capex in a recession because we will need to be full-speed ahead coming out of recession in a moments notice.

In regards to gasoline and diesel, I would like to address the announced diesel shortage in the US.  The gasoline market is doing ok.  We are out of peak demand and should be just fine on gasoline supplies for the winter.  Diesel supplies are historically low right now.  And yes, logistically, things are a complete mess.  However, the East of Rockies is getting to the end of harvest season which will dramatically decrease diesel demand.  In addition, there were issues getting diesel into the pipelines at the correct position.  Barge delays hit the East Coast which forced a dramatic shift to pipeline demand.  The Colonial pipeline is the main feed to the East Coast.  But to get diesel into the Colonial from Southern and Midwest refineries takes time and a lot of planning.  So many shipments were booked and already in process before the barge delay hit the East Coast.  Now, here’s the good news.  Barge shipments will hit the East Coast in the first week of November and subsequent deliveries are on target.  The Colonial Pipeline will also have diesel shipments hitting the East Coast in the first week of November.  So basically, the East of Rockies is in what we call a “short squeeze” for the month of October, but I’m seeing some relief going into November.  In other words, the current situation looks to be temporary and no need for major panic.  The news has done a fantastic job of scaring even people in Wisconsin.  We received numerous phone calls this week from customers concerned that there is a diesel shortage in Wisconsin.  It’s unfortunate that the news is causing additional stress during already stressful times.  Now, don’t get me wrong, we are tight on diesel.  And we will be tight for many months until the Russia/Ukraine war is resolved.  But, we can survive.  The only situation that keeps me up at night is the loss of a major US refinery.  We have absolutely no room for error in our refining capacity.  We need more refineries in the US, not less.  But that will never happen.  Until we can rely on imports again from other countries, the refined market will be right.  But, marketers like myself have worked through the constantly changing industry dynamics and we are making pivots in order to be prepared.  I am confident that supplies will get to where they need to be as long as the government and the news continue to work with the industry and not against.

Propane prices are still holding steady.  Propane continues to be the most valuable form of heating.  Propane is trading under 50% value to crude when historicals are closer to 60%.  Most of the loss in value comes from weak demand in petrochemical production.  We are starting to see news reports of petrochemical demand returning strong into the coming months which will push propane prices up by almost 10%.  So as I have been saying, please continue to take advantage of these lower than average prices, because when propane price moves higher, the move will be swift and not connected to other market conditions.

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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