The Power of the FED

Good afternoon!

I’m writing my update a day early, but once again, I don’t see much changing going into Friday.  As I wrote last week, the market and crude oil prices were grasping at straws to keep a nice rally going.  But I pointed out the true economic cracks in the market reasoning.  Remember, markets are not the economy, nor are they rationale.  Well, this week, the power of the FED was on full display.  Powell testified before Congress and did not mix words.  Even when Senators drilled him and threw anger his way, Powell stood his ground and now said that a half-point is on the table and he will not stop until inflation breaks.  Powell does not see the economy cooling as others are describing.  In addition, China has lowered their GDP forecast and the EU seems to be living in the alternate universe that America was living in the past couple of months.  The EU believes a “soft landing” is possible, but the cracks are showing there as well, just as they did in the US.  In addition, Russia has found plenty of buyers for crude.  Although Russian exports are down, America and Venezuela are filling the gaps.  And we must always remember there is a ton of spare capacity in OPEC.  Natural gas exports continue to run hard from America to Germany and America looks to be able to fulfill most of the gap from the loss of the Nord Stream.  Crude oil production is continuing to try and grow, and refineries are coming back online this year that were closed last year due to either accident or major upgrades.  President Biden has made it clear that the US must continue to invest in crude oil and finished products to bridge America and the world to cleaner fuels.  Crude prices sold off almost 10% on the news this week.  Every week is a push and pull.  WTI crude prices are now moving closer to $70/barrel after testing $80/barrel last week.  I expect crude will continue to trade in the $70-80/barrel range until summer.  If summer demand turns out to be a dud, and Europe slows down, crude oil prices could really nose dive.  But if a nose dive starts to happen, OPEC will cut production to keep the bottom from falling out.  So for now, we wait and see.

In local news, gasoline retail prices rose as the market converts to summer gasoline vapor pressure.  And with summer demand projecting to be lower than last year, refineries are making more diesel than gasoline.  Diesel is in much greater demand around the world.  Therefore refiners can make less gasoline and keep the prices of gasoline higher, all while making better profits on diesel abroad.  I think gasoline will hold around the $3/gallon area in Wisconsin and diesel prices could start to hit the $3.49/gallon on retail if the selloff continues and the Midwest refineries scheduled to open come back online.

Propane continues to build in national inventory and when the winter contract season has completed, I expect to see retail prices drop.  As of now, America has almost 40% more propane in inventory than last year!  I do think summer fill prices will be attractive.  However, I do see a potential for a slight premium on winter contracts over summer fill pricing due to suppliers trying to move as much gas out of the caverns so the country does not run out of storage.  For now, I think the worst of winter is behind us and now we wait and see what summer brings!

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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