Contradictions Racing To The Finish Line

Good morning!

Happy Friday! The news cycle this week was filled with contradicting predictions on future price of crude oil. Crude prices are going to close today with back-to-back weeks of gains. I am baffled by the increased price this week based on the data. But once again, markets are irrational. China released data to start the week that was absolutely terrible. The real estate crisis in China has spread to all aspects of the economy. Xi Jinping announced again that The People’s Bank of China will be injecting cash into the system to hold off a continued massive sell-off in their stock market. In addition, Chinese GDP contracted and predictions for crude oil consumption were cut in half for the coming years. The news out of China was completely bearish. But the bulls won the day due to the announcement of a potential ceasefire in Israel/Gaza. Usually, such an announcement of potential peace in a conflict would make crude prices drop, as geopolitical tensions would start to dissipate. But crude oil prices popped due to markets believing that if the war ends, demand will start to pick up all over the Middle East. The bet is very risky and not supported by history, so I was very confused by the market reaction. The FED announced the adjusted CORE inflation number for January. The rate was 2.8% which is above the FED’s target rate. And CPI in January increased to 3.8%, which is the largest month-over-month increase in almost a year! The announcements from FED governors supported delaying rate cuts until at least the second half of the year. Therewfore, based on the aforementioned FED data, the dollar will stay stronger for longer. A strong dollar puts downward pressure on crude prices due to crude oil being traded in dollars on the world market. But again, crude prices popped on the news because the inflation numbers “were in-line with expectations.” Wow! Markets predicted higher inflation and a kicking of rate cuts down the road which truly makes crude oil cheaper. But because their predictions were confirmed by the data released, the market celebrated and raised crude oil prices! Once again, markets can be irrational. In world news, the International Energy Conference was held in London and the big talk was that US fracking production would peak and decrease causing market tightness. In addition, most believe that the world is not investing enough in crude oil future harvesting to meet the world demand. The conference continued to fan the flames of a crude oil rally, even though demand in China is falling and the potential for demand to drop around the globe is possible over the coming years due to economic pressures. The conference continued to contradict itself all week. OPEC+ is leaving millions of barrels of production on the sidelines. Russia and others are making changes to ensure that all petroleum products get into the marketplace. And OPEC predicts crude oil market demand will contract in the coming year-over-year even though OPEC is keeping cuts on the table. Therefore, all the talk at the conference was contradictory but the bulls latched on to every word that supported higher oil prices. And for the cherry on top, Iran announced that they will be ending their program of enriching uranium for nuclear weapons. The announcement was a huge surprise and de-escalation of potential future conflict in the Middle East. Even though Iran has enough enriched uranium to build some nuclear weapons, the announcement to cease further production is a big deal. But even that news did not cause crude oil prices to drop! To be fair, there was some bullish news reported this week. In America, traditional diesel supplies are continuing to run at lower inventory levels as more renewable and biodiesel enter the marketplace. Basically we are at a point in time where “green energy” diesel is making up the gap in production of traditional diesel. So why is the news bullish? Well, the majority of biodiesel comes from soy. And a lot of diesel is needed to plant and harvest soy. Then there is the energy cost of making the biodiesel. Therefore, we are increasing the use of diesel and driving up the price of soy oil on the open world market. With higher soy oil prices worldwide, many poor countries are forced to buy palm oil which produces the most amount of pollution compared to any other oil. So our EPA rules for cleaner diesel are actually increasing the use of traditional diesel and driving up pollution releases in poor countries. The news caused crude oil prices to pop due to a potential increase in diesel demand that is currently not being supported at current production levels. And then the geopolitical issues of the week were very bullish and supported higher crude oil prices. Russia continued to make advances in Ukraine. Ukraine is struggling to hold. Putin gave his yearly address and stated that he will not take his foot off the gas. And if NATO troops show up in Ukraine, Russia will be forced to reestablish their nuclear missile program. The speech sent jitters through the market because France has floated the idea of sending troops to Ukraine. If any NATO countries send troops into Ukraine, the escalation in the war would go through the roof. And at the end of the week, the potential for a peace deal in Gaza was halted when a humanitarian food supply convoy was attacked. Oh, and another fun fact; during the past two years of being distracted with the war in Ukraine, North Korea now has nuclear weapons that are capable of striking the US. And North Korea said they would be happy to sell their nuclear weapons to Russia. So at the end of the day, even though the bullish news of the week was extremely contradictory, the bullish geopolitical risks are winning the race to the finish line. Personally, I believe WTI crude oil prices are a little over-bought. But any correction downward on WTI crude oil has major support at $70/barrel.

In local news, the Bp Whiting refinery is back to full production and starting to back-fill their supply deficits. Right now they are working on resupplying all their branded fuels, and then they will work on unbranded fuels. The news caused national crack spreads to drop and prices of gasoline and diesel in the CME spot market to drop. However, at the end of February, the future March contract expired and the April contract started trading. In April, gasoline is required by the EPA to meet a summer vapor pressure spec of 13.5 PSI. Therefore, although crack spreads were dropping, gasoline prices went up due to refineries having to start production of summer gasoline that costs more to manufacture compared to winter gasoline. Unfortunately, I do not see retail prices for gasoline or diesel dropping much at the pump.

Propane spot prices fell a bit this week due to extremely warm weather. However, the out-months on propane have firmed up and found support. The support is coming from high levels of national exportation and the belief that crude oil prices will remain higher for longer. Although we might see some cheaper summer fills, the long outlook on propane shows higher prices. But I don’t expect those prices to jump over $2.00/gallon at retail. So overall, very affordable propane prices remain on the horizon for the coming years.

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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