What A Difference A Couple of Weeks Make!

Good morning!

Happy Friday!  There was no update last week as I was on vacation.  As I left for vacation, the US was facing a possible banking liquidity crisis.  Medium sized banks were failing, the world was panicking, depositors were moving funds to the major four banks or monetary safety investments, and the FED was not being clear on how they were going to stop the bleeding.  WTI crude prices fell to the lowest price in a over two years to $65/barrel.  Many investors believed the “black swan” event was happening.  Crude prices and the markets were going to collapse.  Not only did the market and crude prices not collapse, but the market ripped back to higher than it was before the banking crisis!  The FED offered a backstop to all depositors.  A relief rally took momentum and did not stop.  WTI crude prices went up in two weeks from $65/barrel to now $75/barrel in less than two weeks.  The stock market rallied higher as well.  The FED met this week and raised rates 25 basis points, and even the raise did not budge the market rally.  Although many bearish signs are in the works, including liquidity issues in the banking system, a commercial real estate bubble that’s about to burst, student loan debt payments resuming, and high inflation, the markets have all shrugged and moved on ahead.

In world news, the escalation between Ukraine and Russia continues.  Russia is claiming to move tactical nuclear warheads into Belarus and is pulling out of the New START nuclear treaty with the US.  The treaty is an agreement that US and Russia will announce nuclear testing to ensure that either country views a test as a true nuclear attack.  The US condemned the action by Russia which adds further tension that Russia could use a tactical nuclear weapon in Ukraine.  China brokered a deal between Saudi Arabia and Syria and is looking to broker a peace deal between Russia and Ukraine.  Zelensky said that he is also willing to meet with Xi Jinping.  China has been on a role as a “peace maker” which has historically been the role of the United States.  Overall, the actions from China in the past two weeks are displaying signs of a super power that can offer peace treaty guidance to complex foreign relations.  The work of China is weakening the influence of the US around the globe.  The US also sold nuclear submarines to Australia further escalating tensions with China, convinced Japan to limit chip exports to China, and welcomed the President of Taiwan to the US for a visit.  Also, in response to China brokering a peace deal between Saudi Arabia and Syria, Saudi Arabia is funding the construction of a large refinery in China to guarantee an energy relationship for the future.  The US is losing clout in the world quickly.  Therefore, the global tensions in the world are adding a “risk-on” premium to the price of crude oil.  And the cherry on top, Finland looks to be approved for NATO membership next week.  The escalations in world tensions connected to the US continue to grow.  And instead, tensions with China and other countries continue to move towards peace and trade relations.  From a 20,000 foot view, the US has a lot of work to do.  In addition, OPEC is holding firm to keeping production cuts in place.  Iraq lost 450k barrels per day of exports this week, but should be back online within a month.  The support level of WTI at $65/barrel seems to be very strong.  The US is working globally now as a major exporter and I believe that the market has set a floor that WTI prices under $65/barrel is not sustainable.  Although we could see another pull back in prices, I just don’t see WTI crude prices falling below $65/barrel anytime this year.

In local news, crack spreads for refiners got hammered this week as refiners continue to push diesel production over gasoline.  But with a potential recession looming in the US, there is only so much diesel that can be exported.  Therefore, diesel prices have relaxed a bit due to the crack spread collapse.  However, gasoline prices have continued to trend higher due to lowering production of gasoline.  Refiners have decided that the world market appetite for diesel is much stronger than gasoline.  And the potential for lower gasoline demand is on the table for the summer.  Therefore, refiners would rather make money on gasoline locally and use the world price export arbitrage on diesel to their advantage.  I do not expect to see gasoline prices be low this summer, even with potential weaker demand.  Diesel prices could hold a bit lower if we ride into recession.

Propane prices have found support as WTI crude price increased.  When WTI crude prices dropped to $65/barrel for a brief moment, propane prices did not drop that much.  Propane has been trading on a historically low percentage value to crude prices.  Therefore, crude prices really need to drop below $65/barrel to cause a major drop in propane prices.  In addition, due to the mild winter, propane inventories are very high across.  But refiners are sending the message loud and clear that a floor for production is in place for next winter.  I believe we will see cheaper prices in the summer, but a fairly decent premium between summer fill and next season’s heating contract price.  Although I firmly believe next heating season’s contract price will be lower than next year, I would not be surprised to see a 15-20 cent premium between summer fill price and next season’s contract price.  I will be urging everyone to top off their tanks this summer and contract for next season, even at a premium.  The reason is the value percentage of propane price compared to crude oil price.  Crude oil prices have a long way to drop before propane price will truly affected.  And I just don’t see refiners giving up margin as the world continues to push the alternative energy transformation agenda and world economics continue to be volatile.

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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