Someone’s Gonna Blink

Good afternoon,

Lots of big news this week. The dollar index continues to hold on to a floor right now which is buoying WTI crude prices near $65/barrel. OPEC is showing very strict compliance to their cuts, but mostly being held up by Venezuela’s drastic drawdown in production. In the U.S., crude production topped 10MM bpd for the first time since 1970. We have now set a record for daily production and surpassed Saudi Arabia as the number two producer in the world! In addition to the record, the industry sees no signs of slowing down at these prices. The EIA weekly inventory report showed a build in crude for the first time in eight weeks which created an initial dip in the market, but then the market reversed due to the existing exuberance that demand will keep outperforming production. Also in addition, we still have the record, yes record, of hedge fund long positions on crude oil in the market.

So where does all this lead? I am seeing a showdown between hedge fund managers and OPEC. The U.S. oil industry has made it quite obvious that they are not going to slow down. The oil industry is about to go into the refinery maintenance season which will decrease crude demand causing supplies in the U.S. to build. If the dollar index starts to increase in value, then the price of crude will start to decline. These situations are going to pin the hedge fund managers and OPEC against one another. If OPEC increases production by surprise, you will see the market collapse and the hedge fund managers will lose out on the top and hope to sell at a good time during the falling of the knife. If the hedge fund managers “ring the register”, then the price of crude could drop about $10/barrel and both the U.S. and OPEC get pounded on price. But regardless, there is very little true economic support for crude at these levels. To me, the market feels like it’s trying to get WTI to $70/barrel. OPEC is sitting back waiting to see if they should force the hedge fund managers to sell, or enjoy some higher prices for everyone. In other words, someone is going to blink. It’s only a matter of time. And when they do, crude will fall fast and hard.

In local retail news, gasoline and diesel supplies have been very ample throughout winter. No disruptions or pipeline issues so far. Gasoline prices hover near $2.49/gal and diesel prices are around $3.05/gal depending on which winter blend is used in the fuel. I expect these prices to continue in the near term until we see some major changes in crude prices.

Propane has been staying pretty steady. We are still confident that our current price is probably the highest for the year. We hope to see prices relax by the end of February. The weather is now the main driver for propane. We officially have enough propane in the country to make it through the rest of winter. We are starting to track next year’s prices and so far we are seeing numbers not too far off from this year.

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

Best regards,

Jon Crawford – Pres.

Tanking Dollar Causing Crude to Rise

Good morning,

WTI crude oil prices continue to rally on a tanking dollar thanks to the inconsistent comments by US Treasury Secretary Steve Mnuchin. The comments caused one the largest one-day drops in dollar value yesterday which in turn caused WTI crude to rally over $1. As the strength of our dollar declines, commodities such as WTI crude will rise in cost causing higher prices at the pump for gasoline and diesel. In addition to the tanking dollar, U.S. crude oil inventories declined for the 9th straight week. But there is much more to that story. U.S. inventory levels of gasoline and diesel are staying at high levels. Our exporting of crude is staying consistent at 1M barrels/day, but our production is increasing. Basically, we are warming up for a potential snap in crude inventories. If OPEC breaks from cuts or Venezuela ramps up production, there is not enough demand in the world to clean up the surplus. Pair that with the MOST hedge fund long positions EVER in WTI futures history, and we are setting ourselves up for a massive pop. I think $70/barrel on WTI will be the breaking point unless something happens sooner. The entire crude market feels like a boiling pot of water ready to boil over. Looking at technicals, I’m still seeing WTI crude around the $55/barrel mark. I am still holding my position that it’s only a matter of time before the hedge fund managers ring the cash register and move their money somewhere else.

In local retail news, as stated before, the tanking dollar is causing gasoline and diesel prices to rise. Diesel prices with proper winter blending are holding above $3.00/gallon, and gasoline prices are holding above $2.45/gallon on average. Unfortunately, I do not see any give on these prices until the dollar recovers or the futures positions exit the market.

Propane is on course to see lower prices in February if the temperatures stay warm. Right now prices are still well above contracts, so customers who contracted are saving money so far this winter. We are not making any predictions on propane prices for summer or fall of 2018 until we see some direction on the dollar and WTI.

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

Jon Crawford – Pres.