Bulls Continue To Feast

Greetings!

Well, another week went by and the bulls continued to fill their bellies. The war in Ukraine escalated this week. Ukraine bombed three Russian oil refinery/production facilities. The attacks took out possibly 200k bbd of crude oil production. Even though other oil producing countries can quickly make up the difference, the calls went radio silent and the countries decided to the let the bulls continue their run. The war in Gaza seems to have no end in sight. Ceasefire talks failed to materialize again this week. However, the US engaged Iran with talks discussing deescalating the Houthi attacks in the Red Sea. The talks were the first between the US and Iran in over ten years. Iran agreed that deescalating the Houthi attacks are in both parties’ interest. However, many in the world community do not believe that Iran will do anything. In fact, now Iran knows that the US is struggling to contain the Houthi attacks. Some reports now say that attacks might increase due to the talks. China and Japan seem to have found some bottom support in their stock markets. Outside money seemed to slowly trickle back in. Inflation data in the US continued to show a hot economy and supported pushing out rate cuts. And then in a surprise press release, the IEA changed their call to world oil crude supplies falling into deficit this year. Since the beginning of 2023, the IEA called for oil supplies to be in surplus all of 2024. The news this week continued to support higher crude oil prices for the near-term. But the horizon is starting to look a bit hazy. Jamie Dimon from JP Morgan/Chase raised his call of the US falling into recession by mid 2025 to 50%. Many oil traders liquidated long oil positions starting in Q4 of 2024 and beyond. The stronger dollar is probably keeping a lid on WTI price from flying to $90/barrel. But I do think that $80/barrel WTI crude oil will remain for the coming months. The upcoming summer demand and inflationary data through Q3 of 2024 will tell us more. For now, keep your seat belt on and hold tight. Many traders are calling for $100+/barrel oil, but I think that’s a trap based on the very long positions in crude. Patience wins the race and as I have been saying since the end of 2023, 2024 will be a cost-average year with maybe only locking up 25% of one’s petroleum needs.

In local news, the Chicago spot market is not in great shape. The higher spot prices in the Chicago market are looking to hang around for some time. Bp Whiting is still not pumping at full speed. Mobil refinery had a flaring event that shuttered some production. Citgo refinery had an oil leak reported. And then three other refineries announced upcoming maintenance in Q2 of 2024. Therefore, the Chicago refinery market is feeling some short-term pain. I expect Chicago spot economics to run a bit higher compared to our neighbors in the Group for the next few months. Hopefully by summer, Chicago production will be in full-swing and spot prices will drop lower than the Group. In the meantime, I expect to see retail prices of gasoline and diesel to be very choppy. The Chicago spot market trade will be very volatile and the prices at the pump will reflect accordingly.

Propane cost continues to trade at a decent “percentage to crude cost”. However, in my opinion, the devil is in the details. If crude prices stay high, propane cost will trade very flat. And if crude prices drop, the production of propane will also drop. However, the drop in price/production might not cause the price to run much higher because there is so much room for the “percentage to crude cost” to move higher. If crude prices fall and propane prices stay flat, many retailers will pile into future purchases which suppliers want. I think suppliers could use the “percentage to crude cost” to coax retailers to the buyer’s table. Propane inventories also started to build this past week. Usually propane inventories don’t experience an inventory build until April at the earliest. Although national propane inventories are at lower end of the five year average, I could see propane inventories building quickly this summer. In addition, the farm season is not looking good so far which means a potential weak crop drying demand in the fall. I’m still sticking with the possibility for some lower summer-fill prices on propane and next year’s propane heating contract prices to be very similar to this year’s prices.

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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