Are Crude Oil Prices Grasping At Straws?

Good morning!

Happy Friday! Discussion of crude oil prices was fairly quiet this week.  WTI crude traded very sideways and seems to want and try and hit $80/barrel again.  I feel like crude oil prices are grasping at straws to hang on above $70/barrel.  The only really bullish news is that China is reopening and demand will be strong.  However, as China continues to work with Russia, China will import a lot of oil from Russia, therefore not disturbing the overall supply/demand at a catastrophic level.  Plus, OPEC has a lot of spare production capacity and the US continues to increase production at almost pre-pandemic levels.  The economy in the US and around the globe seems to be riding at a peak.  I really fell that eventually the consumer will have to throw in the towel.  Car payments on average are above $1,000 per month with two extra years added onto the loans.  The service industry continues to inflate prices.  Orders from China are starting to decline.  Home mortgage applications dropped to the lowest level in over 28 years as interest rates hit 7%.  Eventually, the consumer will tighten and there just won’t be enough jobs available.  Once the service industry starts to cut employees a bit, look out.  Now, the FED and the ECB are talking about whether to increase rates at a slower pace or increase rates at a greater pace .  However, they are not talking about stopping.  So the news is positive for the markets based on the possibility of slowing rates, but the markets are not the economy.  In addition to all the economic data, the war in Ukraine is such a wild card.  Who knows what will happen there.  All I know is that I do not see OPEC, especially Saudi Arabia, allowing crude oil prices to drop below $60/barrel, even in a recession.  I also don’t see OPEC allowing prices to trade much above $80/barrel.  I see crude prices being very choppy this year with more potential to rise at the end of the year only if Europe and the US economies survive the economic pain as China, India, and Vietnam ramp up economic production.

In local news, gasoline retail prices rose along with diesel.  Refiners are now having to make 13.5 RVP (which is summer gasoline vapor pressure versus much lower in the winter).  Gasoline prices usually climb higher into summer because of the increased cost to produce the product.  However, when looking at the crack spreads on a barrel of oil, I believe refiners are looking to make more diesel than gasoline this summer.  From what I can see, refiners are seeing a drop in gasoline demand going into the summer.  And the possibility of a lower demand gasoline summer means that refiners will raise prices in order to make up the lost volume, rather than compete for market-share.  Refining companies have all become very dependents on higher margin returns in order to pivot into renewable energies.  In addition, the world market for diesel is still very strong and refiners can move diesel barrels overseas at a nice premium.  So why would a refiner produce gasoline which is dropping in demand at home, when diesel is in higher demand at home and abroad?  Even if the summer ends up being a dud for travel, I still see gasoline prices being higher than average.

Propane is holding steady into the end of the winter.  So far, the winter has been 3% warmer than last winter.  Propane demand at home and abroad has been lower as well.  As customers look to save money, thermostats get lowered and alternative heating sources get added.  We are also experiencing customers paying bills with two credit cards.  All of the aforementioned items are combining to push propane inventories over 30% higher than last year at this time!  I expect to see rack prices drop this summer as suppliers and retailers compete for allocation in an oversupplied market.  However, I still expect to see the average of 10-15 cent spread between summer fill price and next season’s contracts.  Propane rarely trades in backwardation (when future prices are lower than spot price) when going into the upcoming year .  The reason for the premium is that no one can predict the next winter.  Propane prices trading two to three years out will go into backwardation, but those prices are more of a hedge bet and need to be evaluated on past historical data and value to crude.  As we approach the end of winter, please make sure to keep your driveway plowed/salted, tree branches trimmed over driveways, and a clear path to your propane tank to ensure a safe and efficient delivery.

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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