US Oil Cartel?

Good morning!

Happy Friday! This week was dominated by news of escalating situations in the Middle East and Ukraine. Israel rejected all options for a ceasefire in Gaza and decided to invade Rafah. Rafah is home to millions of displaced Palestinians. Israel told all Palestinians at the start of the war to evacuate to Rafah when the war began. Now Israel is giving a limited time for the Palestinians in Rafah to evacuate before Israel invades the entire Gaza strip. The US denounced Israel’s plans.  However, the US is continuing to supply Israel with weapons. Netanyahu is not communicating at all with Biden. The lack of communication is causing much anger and frustration inside the Biden administration. There could be a call to stop sending Israel weapons before the invasion of Rafah. Stopping the sale of weapons to Israel would be the first instance where the US denies military support to Israel. Egypt has built an 8 square mile concrete containment wall to hold Palestinians if they should flood the Egyptian border. The increased tensions have pushed Iran to increase their weapons exports to all their proxies fighting on their behalf in the Middle East. There has been no progress with the Houthi situation in Yemen, and in Lebanon, reports are coming in that chemical weapons might have been used by Lebanon against Hezbollah. The inquiry is looking into the truth of the claim, as well as if the weapons came from the US. In Ukraine, Russia launched a supersonic missile that breaks through all lines of defense. The US did not believe that Russia had such capabilities. Therefore, the threat of increased powerful strikes on Ukraine are increasing. In addition, Russia is now hiring Cubans to fight in Ukraine and Russia is exploring placing missiles in space to attack adversaries’ satellites. In crude oil economics news, the IEA is calling for a balanced year in the crude oil market for the remainder of the year. Although supplies have been ample, the amount of increased crude oil demand around the world was cut in half due to the collapsing economy in China and a potential for US recession.  OPEC+ responded saying that demand around the globe will increase beyond production and crude oil supplies will go into deficit. Even though Iraq and Kazakhstan have continued to produce crude oil beyond quotas, Saudi Arabia believes that the robust world demand will dominate supply production. JP Morgan/Chase echoed Saudis’ response and also believes that tensions in the Middle East will escate causing further crude oil supply disruption. In a surprise move this week, oil producing companies in the US all reported that they will cut production to try and boost price and return money to shareholders. The announcements seemed to be very calculated in tandem raising eyebrows that US oil companies are working together to prop up oil prices. The news came on the heels of massive builds in US crude oil inventories reported by the EIA this week. The announcements seemed to try and pour cold water on the bears in the crude market and keep WTI crude oil prices stable. The markets took the news as bullish, but as I like to say, the devil is in the details. Even though all major oil companies in the Permian basin said that they would cut production, the largest companies still only make up just a bit over 50% of all the oil produced in the Permian basin. Therefore, wildcatters are still strong in the Permian Basin. And as long as there is an appetite for crude oil on the open world market, those companies will pump and sell. Taking a 20k foot view, I still believe that WTI is going to trade in the $70-80/barrel price based on economics. Black Swan events to the down or upside will depend on the the situation in the Middle East and Russia, as well as potential economic recession in China and the US. In addition to all the crude oil supply news, the Fed data released this week showed that inflation for December went up, and the initial inflationary reports for January showed an increase in inflation as well.  But even the possibility of a stronger dollar for longer didn’t move crude oil prices lower as is the norm when such events take place.  For now, I see stability in the market so it’s wait and see what will happen next.

In the local markets, Chicago basis finally balanced versus the Group.  The supply shock from the Whiting refinery shutdown seems to be contained. Prices of gasoline and diesel have peaked, so therefore there should be no more upside movement on prices of gasoline and diesel at the pump.

Propane prices followed crude oil prices higher and even climbed higher on days that crude oil prices dropped. Exports of propane continue to be greater than expected and national inventories are falling below the 10 year average. March looks to be colder than normal. Propane prices are well supported in the present moment. If crude oil prices stay high, and propane inventores finish the season closer to the five year average, we might not experience very low summer fill prices. Time will tell and a lot of potential change in propane price is in the hands of mother nature.

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

Best regards,

Jon Crawford

Bulls Gained Momentum, But Is The Rally For Real?

Happy Friday!

This week crude oil news cycle was not as spicy as last week. 🙂 Crude oil prices started the week moving lower and continued through Wednesday. China’s stock market rout continued this week and consumer prices dropped again for the 16th straight month. The news pushed the bears along believing that Chinese crude oil demand will decrease this year. Then on Tuesday and Wednesday a few popular FED governors spoke and threw cold water on March rate cuts occuring, and also reported possibly only two to three rate cuts for the entire year. As usual, when the dollar stays strong, crude oil prices start to drop because crude oil is traded in dollars. In addition, on Wednesday, crude oil inventories in the US increased during the week prior, even though production and exports remained at record highs. The increase in stockpile coupled with the FED’s cold water on March cuts, pushed crude prices even lower. Then at the end of day Wednesday crude oil prices started to recover as the US reported killing the Iraq militant who planned the attack on the US base in Syria. As crude oil prices started to rally, the top general in Ukraine spoke out against continuing the war with Russia. Ukraine is reporting heavy loses of ammunition and the US has been unable to pass additional funding for Ukraine. Then in after hours trading, Hamas offered a ceasefire deal to Israel. Crude oil futures flattened out on a possible peace deal in the Middle East. However, we woke up on Thursday to Israel rejecting the peace deal, and Zelensky firing his top general. The news pushed WTI crude oil price past $75/barrel for the first time in a few weeks.  In two weeks, OPEC+ is having their meeting. Right now Iraq and UAE are both pumping 100k bbd of crude oil over their quotas. The meeting will all hang on Saudi Arabia’s decision. The market is pricing in that Saudi Arabia will continue their status quo. However, if Saudi Arabia decides to increase production, crude oil prices will probably collapse.  But a world-wide market share competition did not go well for Saudi Arabia last time, so I’m placing my chips on the bet that Saudi Arabia stays the course.  The week ended with the US government reporting an adjusted increase to CORE inflating in November and confirmed December’s inflation number.  The release gave further support for the FED to keep rates higher for longer.  Therefore, higher rates support crude oil prices.  Crude oil prices finished higher this week for the first time in a few weeks.  In addition, WTI crude oil price finished above the psychological support price of $75/barrel.

In local news, gasoline and diesel spot prices continue to run at much higher prices due to the BP Whiting refinery being down. From the rumblings on the ground, the refinery could take 2-4 weeks to be fully operational again. So until the refinery is fully operational and delivering refined products into the market, be prepared to pay higher prices for both gasoline and diesel at the pump. Once the refinery is good to go for a bit, our local market should hopefully drop in price and offer some relief.

Propane prices have followed crude oil prices higher this week. Even though January was officially the warmest January on record, propane exports are at record highs. Our national inventories are now at the 10 year average with the warmest winter on record. Remember, we started the heating season with the top-10 ever highest volume of propane inventory in US history! So for propane inventories falling to 10-year averages even though we are experiencing a possible warmest winter on record, the appetite for propane exports is not slowing down. I expect propane to trade in tandem with crude for the coming months. I also am not seeing where retail prices will drop below $1/gallon this summer. Summer fills could possibly even be higher than today’s price if crude oil prices remain high throughout summer and exports limit the amount of propane inventory building needed for next winter. So far now, it’s a wait and see.

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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