Ending Where We Started
Good Morning!
Happy Friday! This week, crude oil prices followed a bell curve, ending where they began after a mid-week spike. Economic news from around the globe overshadowed any geopolitical risk premium. Despite some complexities in the details, crude oil prices are struggling to find support. China reported weak manufacturing data and low imports. The Federal Reserve announced that a rate cut is possible in September. Additionally, the U.S. unemployment rate rose to 4.1%, with only 175,000 jobs added in July, signaling economic weakness and lower demand for crude oil. OPEC+ decided to continue unwinding their supply cuts, contributing to a bearish sentiment.
However, some details suggest a different outlook. This week, Israel assassinated Ismail Haniyeh, the political leader of Hamas, in Iran. This action halted ceasefire negotiations and almost guarantees a military response from Iran, causing crude prices to spike. Traders adjusted their futures positions to long on crude oil. OPEC+ also indicated that cutting production is still an option if crude prices drop in August, and Russia is pumping crude at its lowest level in years. Producers are disciplined in avoiding oversupply, leading to an oversold market with potential buying opportunities. I do not expect crude prices to drop below $70 per barrel.
The Mobil Joliet refinery in Illinois is facing issues restarting after a tornado-induced shutdown a few weeks ago. This delay has caused a spike in regular gasoline prices and a significant increase in reformulated gasoline prices. The shortage prompted the Federal EPA to issue a waiver allowing counties designated for reformulated gasoline to purchase regular gasoline until inventories are replenished. Gasoline and diesel prices are expected to remain higher until the Joliet refinery is fully operational.
Propane spot prices have slightly decreased from their peak but remain strong compared to crude oil prices. Propane futures are robust based on inventory levels and predictions of a polar vortex this winter. Home heating customers are advised to fill their propane tanks this summer and contract for the upcoming heating season.
As always, if you have any questions, comments, or concerns, please feel free to give us a call.
Best regards,
Jon Crawford
Trap Door or a New Floor?
Happy Friday! This week, crude oil prices experienced significant fluctuations, with WTI crude dropping below $80 per barrel for the first time in several weeks. The $80 per barrel mark has been considered a psychological support level. The decline in crude prices was primarily influenced by expectations of the Federal Reserve cutting rates in September, weaker-than-expected economic data from China, and the potential for another ceasefire agreement between Israel and Hamas. Although these factors were interpreted as bearish, there are inconsistencies in the details.
The anticipated Federal Reserve rate cut has already been factored into the market for over a month. Consequently, the recent sell-off based on Federal Reserve data appears to be an overreaction. The economic data from China was indeed weak, prompting China to lower its borrowing rates. However, China has a history of manipulating its currency to remain competitive globally. As the United States approaches a presidential election, China is prepared to engage in trade disputes with a lower yuan valuation. Despite President Biden’s announcement of a potential ceasefire deal between Israel and Hamas, Benjamin Netanyahu, in his speech to the US Congress this week, did not mention any such deal.
A closer examination of these three points suggests that the recent drop in crude prices is a temporary anomaly. Similar patterns were observed last month, with prices quickly rebounding. Once WTI prices fall to around $78 per barrel, traders tend to clear positions and buy back in. Therefore, I believe crude oil is once again oversold. The bullish data for crude oil prices this week was robust. The US economy grew at a 2.8% rate, exceeding expectations. The consumer economy in the US shows no signs of slowing down. The EIA reported another drawdown in crude oil inventories nationwide, and the Federal Reserve’s PCE number aligned with expectations. Without any significant contraction in the US economy, I do not foresee a path to lower oil prices. Oil companies continue to reduce oil rig counts to maintain steady production levels. I firmly believe that $80 per barrel is the floor for WTI crude oil prices, and recent events are likely a temporary anomaly.
In the local Chicago market, Mobil announced plans to restart their Joliet refinery this weekend, with refined products expected to start flowing in early August. This news caused gasoline and diesel spot basis prices to drop. While gasoline spot prices dipped, diesel spot prices did not fall as much as anticipated due to tight diesel inventories going into the turnaround season. Additionally, the Midwest is predicting a large harvest this season, which will increase diesel demand and pressure supplies this fall.
Propane prices remained stable despite the dip in crude oil prices. The EIA reported a small build in inventory this week, which offset the previous week’s large build caused by Hurricane Beryl closing exports rather than increased production. I expect propane prices to continue trading within a narrow range. Propane still offers excellent value compared to crude oil prices. I recommend filling your tank this summer and locking in prices for the upcoming heating season.
As always, if you have any questions, comments, or concerns, please feel free to contact us.
Best regards,
Jon Crawford