Good morning!

Happy Friday! There was a lot of data to unpack this week. Crude oil prices continued their slide. WTI crude price looks to close below $80/barrel for the first time in almost a year. The drop in price below $80/barrel forced a futures options trading repositioning of nearly 85% in the market. Almost every trader sold off their long positions and bought shorts. Although the data this week was interpreted as bearish, I continue to say that the drop in crude oil price is an incredible buying opportunity for the spot market. Starting the week, there was an announcement that Israel was going to negotiate with Hamas on a peace deal. The news caused commodities to drop in price. Many believe the deal will get done. A ceasefire would pull more geopolitical risk out of crude oil prices. However, when you dig into the details of the peace deal, I don’t see how the deal will get done. The details of the deal are as follows. Hamas is willing to release hostages in exchange for hundreds of Hamas POW’s being held by Israel. In addition, Israel would allow Hamas to exist with a recognized two-state solution. The framework seems DOA, but the markets love volatility. In addition to the potential ceasefire, the US announced a potentially very risky accord with Saudi Arabia. The US would provide Saudi Arabia with weapons and military support, and cut back on military support for Israel. And in return, Saudi Arabia would recognize Israel as an independent state in the Middle East and cut back on doing business with China. Also included is a clause that the US and Saudi Arabia will work together to keep Iran in check. I believe the accord has the risk of upsetting Israel, Iran, and China. Israel does not like the US getting cozy with too many Middle Eastern countries due to lack of trust. The accord could also pressure Iran to continue attacks in the region in response to the US meddling further in Middle Eastern affairs. And I’m sure China would not take too kindly to the accord as well. Therefore, the accord runs the risk of causing geopolitical tension. There has also been a lack of enforcement on Iranian crude exports. Iran’s 1.5M barrels/day exports are all being sold to China and India with no issue. The world has been calling on the US to enforce sanctions on Iranian oil exports, but Biden knows that the sanctions would raise crude oil prices. And because we are in an election year, Biden will do everything in his power to keep crude prices low. At home, there was a lot of data released. The FED decided to keep rates unchanged as inflation data continues to be holding stubbornly high. However, today’s jobs report showed a large decline in new job openings and the unemployment rate went up. The news is being digested and interpreted that the FED could move up rate cuts. If so, the price of crude oil would increase due to a weakening dollar. The EIA also reported a large increase in crude oil inventories. However, the EIA is known to be very manipulative with their data. Once again, this is an election year. The EIA will continue to try and keep a lid on oil prices. Biden is definitely the president of choice for the EPA and their policies. In summary, the drop in WTI crude oil price below $80/barrel is an incredible opportunity to put on long trades for crude oil. I do not see OPEC+ increasing production this summer. Saudi Arabia and UAE need the price of oil to move higher. Summer demand will be kicking in soon, as well as hurricanes. In other words, the drop in price is hanging on by a thread. We will see what next week brings!

The Chicago spot market prices dropped in tandem with crude oil prices. Although gasoline prices remained very firm going into the summer demand season. Diesel prices are at their lowest price in about a year. I expect refiners to look at exporting more refined products as opposed to selling spot. Focusing on exports has a better potential of pushing prices compared to selling locally. There are many incentives to pinch refined supplies at home and make prices go up. Refiners can easily export and maintain good margins. So refiners will be running at full steam, but pushing products overseas as opposed to going long in the spot market. Again, we are in an election year, and the oil companies are in opposition to Biden. I believe the oil companies will do whatever is necessary to try and inflate prices going into the fall of this year.

Propane spot prices also dropped in tandem with crude oil prices. However, futures pricing are remaining fairly firm. Propane national inventories are not building at a rapid clip. We will be keeping an eye on national inventories. With exports running at record highs, the current drop in propane prices could be a headfake and a great buying opportunity. For now, we are sitting back and waiting. Next season’s heating contracts should be released in mid-May. I also recommend filling up your tank this summer. Retail price on propane currently has great value.

As always, if you have any questions, comments, or concerns, please feel free to contact us.

Best regards,

Jon Crawford