Crude Oil Prices Finding Weakness

Good morning!

Happy Friday!  Although the stock market has been shrugging off FED rate increases, attrition at nearly every company, increasing credit card debt and interest rates , weak retail purchasing in December, and weak guidance from almost all major companies in the DOW and NASDAQ, crude oil prices are not buying into the hubris of the market.  WTI crude oil prices have tumbled back to near $75/barrel and are now looking at $70/barrel as the next floor.  The IMF thinks that the recession in Europe is over and OPEC is keeping cuts the same.  Even the positive global news is not budging crude prices very much.  The truth is that the United States is building inventories of crude oil, gasoline, diesel, and propane.  In addition to our builds in inventory, refining capacity is coming back online in 2023 and the most deep water drilling is back online since the start of the pandemic.  Also, Pres Biden is opening up more crude oil exploration in Alaska.  The interesting development this week was the relationship between India and Russia.  We have an embargo on Russian crude and refined products.  But we don’t have any sort of embargo on countries who purchase Russian crude oil.  Some of the reason for our builds in inventory is because India is purchasing the majority of their crude from Russia, refining the crude into diesel, and then selling it to the United States.  Therefore, we have found a backdoor to allow Russia to continue their sale of crude, even at discounted rates.  Although Russia has dropped in production and is losing some money, the development with India is at least keeping Russia afloat.  If the war were to end, I would expect crude oil prices to drop even further since competition for customers would become fierce.  And already with India buying so much more crude oil from Russia, eventually the Middle East is going to fight back.  And in one last macro development, China has announced that they are watching the war in Ukraine much more closely.  The statement was interpreted as saying to Russia that if they escalate too far, China might retaliate.  And right now, China is one of Russia’s only allies.  But for now, prices have been falling and hopefully the drop in prices will start to make their way to savings on retail refined products in America.

In local news, after the one cold week of winter, the temperatures for the rest of February and even March look to be in the 30’s and 40’s.  Therefore winter blending of diesel will go back to winter additives only.  With the removal of expensive #1 diesel from winter blending, diesel retail prices should ease.  Gasoline continues to trade in a narrow range, even with the drop of crude oil prices.  I believe that suppliers are keeping gasoline prices higher due to decreasing demand.  Eventually, as we get into spring, if crude prices remain low, suppliers will start to compete in the marketplace.

Propane supply has been absolutely baffling.  Even with refiners operating below 90% capacity, propane production and exports are at record levels.  As of right now, we have over 40% more propane in national inventories, and that is not including Canadian rail supply!  Once the winter temps leave and if crude oil prices stay under control, I think propane prices will fall hard and summer fills will be very attractive.  In addition to falling propane prices in the spring, next year’s heating contract prices should hopefully be lower as well.  As a reminder, please keep your driveways cleaned/salted, trees trimmed along the driveway, and a clear path to the tank to ensure a safe and efficient delivery of  propane.

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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