Good morning,
Well, we have a whirlwind of info coming our way that is affecting crude prices. WTI price closed over $50/barrel this week and then immediately fell back, only to regain strength yesterday. WTI has a chance to close above $50/barrel for the week. Now a lot of events are percolating causing these swings. OPEC is meeting today to discuss extending cuts. Many countries, including now Iraq, are calling for an extension. Iraq has always been reluctant to join in more cuts and has also cheated along the way. But nevertheless, their statements are making waves. In addition, Nigeria and Libya are invited to the OPEC meeting. These two countries are a swing in the cut. If they join the cut, then we have a situation for true production cuts. However, I would expect other countries to cheat if Nigeria and Libya join, plus the chances of these two joining are slim. Saudi Arabia has cut their exports to the lowest level in years, but is also in line with yearly production cuts. I don’t expect Saudi Arabia to continue at their current levels for longer than 3-6 months.
Also this week, tensions with North Korea continued to increase as President Trump and Kim from North Korea exchange heated words. Kim is also making plans to potentially test a H bomb in the Pacific which is making everyone nervous. And speaking of oceans, the never ending train of hurricanes seems to be continuing and causing all sorts of production issues and demand erosion. Since the hurricanes have subsided in the U.S., production is back to normal and has increased since last month.
The U.S. is now producing over 9.5M barrels/day in crude and advances in technology and efficiency are allowing most energy companies to make money at $35/barrel WTI. So with the U.S. at the highest level of production and profits coming in at lower levels in price of crude, the U.S. has truly become the swing producer of the world. Time will tell how crude plays out in the true supply/demand market, but I am still hesitant based on economics to call crude moving above $55/barrel in the next 6 months. And the icing on the cake was the FED announcing the unwinding of the balance sheet which is finally putting some strength into the dollar trade. The stronger dollar will help curb any unrealistic breakouts in WTI pricing.
Propane inventories have peaked around 80MM barrels versus over 100MM barrels last year. We used about 60MM barrels of propane last year. So if demand, exports, and corn drying are about the same, we will be ok. But if we see upticks in demand, corn drying, and exports, we could be in trouble. However, propane prices are trading at about 75% value to WTI versus 50% value last year. So some are thinking propane could be over bought at these numbers. Producers locking in at these numbers gives them good hedging to keep producing at high levels going into the winter. So hopefully production continues at high levels throughout the winter.
In local retail news, gasoline prices have eased a bit from the Labor Day highs, but are still all over the board as the market finds its footing. In addition, a refinery issue in Chicago caused another price spike in gasoline, so any further downside movement has been capped temporarily. Diesel prices have been more stable but are still at the highest levels of the year. Depending on how all the previous situations described play out, retail prices will hopefully be capped for the year. Propane prices have surged over 25 cents in the last month. I have been writing that this was going to happen since back in May. Although contract and rack prices are higher, I would still recommend locking in your price at these levels since there is more risk for upside movement than downside.
As always, if you have any questions, comments, or concerns, please feel free to give us a call.
Best regards
Jon Crawford – Pres.
Crawford Oil and Propane