Cap on Russian Crude Price a “Nothing-Burger”?


Winter has finally arrived in Wisconsin!  December is looking to be colder than last year with more snow and January is looking to be colder than normal.  And February could treat us to some nice Polar Vortex action.  But that’s a long ways off and we want to think about the holidays and fun stuff!  🙂  In addition to “fun stuff”, the G7 passed an initial resolution today to cap Russian imports at $60/barrel which is much lower than the current Brent price of around $86/barrel.  At first blush, the announcement looks scary and bound to cause retaliation from Russia such as cutting off oil  exports.  However, the announcement is more of a “nothing-burger” and face-saving.  Russian crude actually trades at a lower rate to Brent.  Russian crude is currently priced around $48/barrel.  So there is plenty of upside for Russia at the proposed cap of $60/barrel.  Basically, there is no Russian crude being sold above $60/barrel right now and when reading the tea leaves of the world economy, the chances of the cap being enforced is fairly slim.  In addition, Russia already announced that they would work with everyone if the cap is realistic.  And $60/barrel is a realistic number.  So for now, enjoy the news and watching everyone talk about about the G7 is gonna “stick it to Russia”, when in fact, the cap is a “nothing-burger” in my opinion.  In the US, WTI crude prices rose again above $80/barrel, but supply of gasoline and diesel are in better shape causing a spot market price collapse.  Therefore, future contract pricing finally moved into contango from backwardation allowing suppliers to possibly store extra product for future delivery.

In local news, gasoline and diesel prices completely collapsed post harvest in America.  Gasoline retail price is nearing $2.99/gallon.  But diesel retail prices are all over the map with spreads as much as $1.00/gallon.  There is a reason for these spreads.  As we go into winter, many suppliers like myself, try to offer the best blended product to meet the everchanging and hard to predict winter weather.  In preparation, many suppliers blend their diesel with additives and #1 ULSD to help with maintaining optimum operation of vehicles in cold weather.  The usual spread in price between #2 ULSD and #1 ULSD is around 60 cents per gallon.  The spread right now is $1.25/gallon!  Therefore, an optimal blend of 70/30 or 80/20 with #1 ULSD now costs between 25-40 cents/gal more!  So always make sure if you are buying diesel in the winter to check what the blend is at the supply point.  Some retail stations do not blend properly and can cause issues when temperatures get close to zero degrees and below overnight.

Propane prices continue to hold steady with healthy builds in inventory.  However, with the cold weather coming and petrochemical demand possibly increasing, propane prices are primed in a moments notice to jump 30-50cents/gal.  Although board price is cheaper than contract price right now, we have five months of winter left to go.  I expect propane prices to really pop in January and February.

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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