Crude Oil Price Might Be Disconnecting From Reality

Good morning!

Happy Friday!  First of all, our thoughts and prayers go out to everyone affected from the earthquake disaster in Hungry and Syria.  The devastation and loss of life has been almost incomprehensible.  Part of the devastation did affect crude oil exports out of hungry that feeds China, so WTI crude oil prices rebounded from approaching $70/barrel and started heading towards $80/barrel.  In addition, Russia announced that they will be cutting 500k barrels per day of production to try and prop up prices.  Although these major events are of great concern for higher oil prices, the bearish news seems to be shrugged off and a disconnect is forming.  The dollar is still very strong and I do not believe the FED is done with raising rates or that a “deflationary” period has begun.  The attrition at companies continues to be strong and is spreading beyond tech companies.  Credit card debt is piling up on Americans not wanting to change lifestyles post Covid.  In addition, mortgage refinancing was up 18% when 30 year rates hit 5%!  Home owners are trying to refinance to gain access to HELOC money, and we know those HELOC rates are higher than 5%.  Eventually, the US consumer is going to be cutting back on spending. The money is starting to run out.  I believe that the FED will hit 5% on rates or even go higher.  Companies are “taking the medicine” as they say, but consumers are not throwing in the towel just yet.  In addition, the US continues to build crude oil inventories, gasoline inventories, and diesel inventories at only 87% refining capacity.  We are building inventories in the US and more refineries are coming online within six months.  Another big disconnect was possible response from OPEC to Russia’s announced production cuts.  The move was announced without the approval of OPEC.  I believe that OPEC will respond to Russia by increasing production and possibly even removing Russia from further OPEC meetings.  No one in OPEC likes to have a country act alone.  Venezuela crude oil is also starting to come to market along with crude from Mexico.   And refining capacity is gaining momentum around the globe.  I truly believe that the crude oil markets are disconnecting from the facts.  But that’s the nature of markets!  Markets are irrational, and separate from the economy.  The next two to three months will really be telling.

In local news, gasoline and diesel cost have been on a roller coaster due to local economics coming out of winter.  Many suppliers are trying to figure out how much gasoline to produce as the vapor pressure requirements change in March, yet demand could be a dud this summer.  Diesel prices are bouncing around as well.  Because of the roller coaster in local economics, consumers will experience retail prices all over the map for the coming week or so.

Propane prices are starting to rise, even though inventories are sitting at 40% higher than last year with record production and exportation.  The winter has been mild compared to last year and I believe suppliers are going to raise margins to retailers in order to make up for loss of sales.  But watch out for April.  I think once winter contracts clear end of March, propane prices will start to fall as suppliers compete for gallons.  If we continue at the current pace in propane production, we should experience some great summer fill pricing, as well as lower energy cost for next heating season.  As always, please make sure to plow/salt your driveway, keep a clear path to your tank, and trim any trees overhanging your driveway to ensure a safe and efficient propane delivery.

If you have any questions, comments, or concerns, please feel free to give us a call.

Best regards,

Jon Crawford

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