Ships Passing In The Foggy Night

Good morning!

Happy Friday! The crude oil trade this week was very foggy with bears and bulls passing each other multiple times in the night. There were no major collisions, but the ships are moving closer together. First up was the foggy reports on China’s economic activity. Evergrande, the largest Chinese Commercial Real Estate Group, was forced to liquidate due to a court ruling in Hong Kong. The ruling sent waves through the world markets as many investors were from countries outside of China. China responded by injecting more cash into their economy and lowering interest rates. The news was a pile on to the fears that China’s economy is slowing and therefore will decrease their crude oil consumption. All of the activity in China weighed on crude oil markets and prices began to fall. Secondly, the US announced that they have a plan to retaliate against Iran for their drone strike that killed three American soldiers over the weekend. Iran pleaded with the US that diplomacy would be a better option. The US denounced the possibility of having any discussion and instead heavily struck the Houthis in Yemen. The retaliatory strikes form the US against Iran did not happen this week, but time will tell. The news gave support to higher crude oil prices due the potential fog of further war in the Middle East. Thirdly, on Wednesday the US EIA reported a build in crude oil inventories. Industry experts were expecting a decline in inventories due to the Red Sea disruption. Europe began placing more orders for crude oil from the US and Brazil due to the freight arbitrage between Middle Eastern countries having to sail around the horn of Africa instead of going directly through the Red Sea corridor. Fourthly, the Fed spoke and said that interest rate cuts are on the table, but a rate cut in March was probably not going to happen. The news caused fog to spread throughout the markets. Traders continued to price in the rate cut for March causing crude oil prices to fall due to the potential of a weaker dollar. Even though all the news on Wednesday wasd bullish, the bear traders pushed their ships straight ahead and passed the ship of the bulls in the night. Fifthly, on Thursday Canada announced approval of an east to west coast crude oil pipeline that will give Canada access to exportation of their 4.1M barrel/day crude production into the world market. As of today, 100% of Canadian crude goes to the US. The US has all the leverage for negotiating prices with Canada because Canada has nowhere else to go with their crude. In the past ten years, I’ve pushed and lobbied that the US should have found a way to run the Canadian crude through a US pipeline to the Gulf Coast. Now I know the Keystone pipeline was very controversial and not needed for US energy security. However, the US would have been able to control Canadian exports, which in turn would have given the US leverage to negotiate crude purchases from Canada. Instead, the US gambled that Canada would never be able to pass legislation allowing a crude oil pipeline to be built throughout the country to the west coast. Well, Canada was able to accomplish the impossible. With Canada having access to the open crude oil market, the East of Rockies refiners in the US will now be forced to find new crude imports from other countries. Or US refiners will be more dependent on local crude oil producers. Regardless, the actions from Canada this week could bring downward pressure on world crude oil prices because Canada can cut direct deals with Japan, Singapore, and China. However, even though crude oil prices could experience downward pressure, the US crack spreads on crude East of Rockies will increase dramatically causing the price of gasoline and diesel to increase. Sixly, the newswires announced that a potential long-term ceasefire is on the table in Gaza. The news caused a sell-off in crude prices due to the potential of turning down the temperature in the Middle East and avoiding an escalation of conflict in the region. Seventhly, Saudi Arabia reported a downturn in their economy due to revenue losses from lower crude oil exports. Therefore, a potential for Saudi Arabia to possibly increase production or offer discounts on crude oil prices to increase revenues is on the table for the first time in years. And lastly, today the government released jobs data which new jobs added as well as the unemployment rate. Job hirings increased at a greater pace than expected, even though firings increased. And in addition, surprisingly the unemployment rate dropped. The traders aboard the bears’ ship passed the bull’s ship again and WTI crude prices collapsed this morning. The drop has spooked a lot of traders to change position on a March FED rate cut. Therefore, if rates stay higher for longer, crude oil prices should continue to experience downward pressure from a stronger dollar. In conclusion, a LOT of data was released this week. Crude oil prices will report a loss for the week. Even though the data is extremely foggy, the trader’s on the bears’ ship passed by the bulls without any accident. A potential for crude oil prices to drop below $70/barrel is back on the table.

In local news, Chicago spot market prices skyrocketed yesterday due to Bp’s Whiting refinery going offline. The Whiting refinery is the largest refinery East of the Rockies refining about 500k barrels of crude oil per day. Bp is not releasing much information other than a possible power outage. The bad news, is that refineries can take anywhere from 5-14 days to regain full production. Therefore, I expect to see retail prices at the pump for both gasoline and diesel increase in the coming weeks. However, the increase in price could be short lived.

Propane prices increased this week even though crude oil prices dropped. On Wednesday, the EIA reported a second straight week of massive drawdowns in national propane inventories. The drawdown comes on the back of cold weather and massive exports. EVen though temperatures are looking to be warm in the coming weeks, I do not see propane prices dropping considerably. The appetite from Europe for propane exports is extremely robust due to the Red Sea conflict and the inability to purchase cheaper propane from Saudi Arabia. Even though the weather looks to be warmer, I always like to remind our customers to keep their driveways clean and have a clear path to their propane tank in order 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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