US Oil Cartel?

Good morning!

Happy Friday! This week was dominated by news of escalating situations in the Middle East and Ukraine. Israel rejected all options for a ceasefire in Gaza and decided to invade Rafah. Rafah is home to millions of displaced Palestinians. Israel told all Palestinians at the start of the war to evacuate to Rafah when the war began. Now Israel is giving a limited time for the Palestinians in Rafah to evacuate before Israel invades the entire Gaza strip. The US denounced Israel’s plans.  However, the US is continuing to supply Israel with weapons. Netanyahu is not communicating at all with Biden. The lack of communication is causing much anger and frustration inside the Biden administration. There could be a call to stop sending Israel weapons before the invasion of Rafah. Stopping the sale of weapons to Israel would be the first instance where the US denies military support to Israel. Egypt has built an 8 square mile concrete containment wall to hold Palestinians if they should flood the Egyptian border. The increased tensions have pushed Iran to increase their weapons exports to all their proxies fighting on their behalf in the Middle East. There has been no progress with the Houthi situation in Yemen, and in Lebanon, reports are coming in that chemical weapons might have been used by Lebanon against Hezbollah. The inquiry is looking into the truth of the claim, as well as if the weapons came from the US. In Ukraine, Russia launched a supersonic missile that breaks through all lines of defense. The US did not believe that Russia had such capabilities. Therefore, the threat of increased powerful strikes on Ukraine are increasing. In addition, Russia is now hiring Cubans to fight in Ukraine and Russia is exploring placing missiles in space to attack adversaries’ satellites. In crude oil economics news, the IEA is calling for a balanced year in the crude oil market for the remainder of the year. Although supplies have been ample, the amount of increased crude oil demand around the world was cut in half due to the collapsing economy in China and a potential for US recession.  OPEC+ responded saying that demand around the globe will increase beyond production and crude oil supplies will go into deficit. Even though Iraq and Kazakhstan have continued to produce crude oil beyond quotas, Saudi Arabia believes that the robust world demand will dominate supply production. JP Morgan/Chase echoed Saudis’ response and also believes that tensions in the Middle East will escate causing further crude oil supply disruption. In a surprise move this week, oil producing companies in the US all reported that they will cut production to try and boost price and return money to shareholders. The announcements seemed to be very calculated in tandem raising eyebrows that US oil companies are working together to prop up oil prices. The news came on the heels of massive builds in US crude oil inventories reported by the EIA this week. The announcements seemed to try and pour cold water on the bears in the crude market and keep WTI crude oil prices stable. The markets took the news as bullish, but as I like to say, the devil is in the details. Even though all major oil companies in the Permian basin said that they would cut production, the largest companies still only make up just a bit over 50% of all the oil produced in the Permian basin. Therefore, wildcatters are still strong in the Permian Basin. And as long as there is an appetite for crude oil on the open world market, those companies will pump and sell. Taking a 20k foot view, I still believe that WTI is going to trade in the $70-80/barrel price based on economics. Black Swan events to the down or upside will depend on the the situation in the Middle East and Russia, as well as potential economic recession in China and the US. In addition to all the crude oil supply news, the Fed data released this week showed that inflation for December went up, and the initial inflationary reports for January showed an increase in inflation as well.  But even the possibility of a stronger dollar for longer didn’t move crude oil prices lower as is the norm when such events take place.  For now, I see stability in the market so it’s wait and see what will happen next.

In the local markets, Chicago basis finally balanced versus the Group.  The supply shock from the Whiting refinery shutdown seems to be contained. Prices of gasoline and diesel have peaked, so therefore there should be no more upside movement on prices of gasoline and diesel at the pump.

Propane prices followed crude oil prices higher and even climbed higher on days that crude oil prices dropped. Exports of propane continue to be greater than expected and national inventories are falling below the 10 year average. March looks to be colder than normal. Propane prices are well supported in the present moment. If crude oil prices stay high, and propane inventores finish the season closer to the five year average, we might not experience very low summer fill prices. Time will tell and a lot of potential change in propane price is in the hands of mother nature.

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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