Ships Passing In The Foggy Night
Good morning!
Happy Friday! The crude oil trade this week was very foggy with bears and bulls passing each other multiple times in the night. There were no major collisions, but the ships are moving closer together. First up was the foggy reports on China’s economic activity. Evergrande, the largest Chinese Commercial Real Estate Group, was forced to liquidate due to a court ruling in Hong Kong. The ruling sent waves through the world markets as many investors were from countries outside of China. China responded by injecting more cash into their economy and lowering interest rates. The news was a pile on to the fears that China’s economy is slowing and therefore will decrease their crude oil consumption. All of the activity in China weighed on crude oil markets and prices began to fall. Secondly, the US announced that they have a plan to retaliate against Iran for their drone strike that killed three American soldiers over the weekend. Iran pleaded with the US that diplomacy would be a better option. The US denounced the possibility of having any discussion and instead heavily struck the Houthis in Yemen. The retaliatory strikes form the US against Iran did not happen this week, but time will tell. The news gave support to higher crude oil prices due the potential fog of further war in the Middle East. Thirdly, on Wednesday the US EIA reported a build in crude oil inventories. Industry experts were expecting a decline in inventories due to the Red Sea disruption. Europe began placing more orders for crude oil from the US and Brazil due to the freight arbitrage between Middle Eastern countries having to sail around the horn of Africa instead of going directly through the Red Sea corridor. Fourthly, the Fed spoke and said that interest rate cuts are on the table, but a rate cut in March was probably not going to happen. The news caused fog to spread throughout the markets. Traders continued to price in the rate cut for March causing crude oil prices to fall due to the potential of a weaker dollar. Even though all the news on Wednesday wasd bullish, the bear traders pushed their ships straight ahead and passed the ship of the bulls in the night. Fifthly, on Thursday Canada announced approval of an east to west coast crude oil pipeline that will give Canada access to exportation of their 4.1M barrel/day crude production into the world market. As of today, 100% of Canadian crude goes to the US. The US has all the leverage for negotiating prices with Canada because Canada has nowhere else to go with their crude. In the past ten years, I’ve pushed and lobbied that the US should have found a way to run the Canadian crude through a US pipeline to the Gulf Coast. Now I know the Keystone pipeline was very controversial and not needed for US energy security. However, the US would have been able to control Canadian exports, which in turn would have given the US leverage to negotiate crude purchases from Canada. Instead, the US gambled that Canada would never be able to pass legislation allowing a crude oil pipeline to be built throughout the country to the west coast. Well, Canada was able to accomplish the impossible. With Canada having access to the open crude oil market, the East of Rockies refiners in the US will now be forced to find new crude imports from other countries. Or US refiners will be more dependent on local crude oil producers. Regardless, the actions from Canada this week could bring downward pressure on world crude oil prices because Canada can cut direct deals with Japan, Singapore, and China. However, even though crude oil prices could experience downward pressure, the US crack spreads on crude East of Rockies will increase dramatically causing the price of gasoline and diesel to increase. Sixly, the newswires announced that a potential long-term ceasefire is on the table in Gaza. The news caused a sell-off in crude prices due to the potential of turning down the temperature in the Middle East and avoiding an escalation of conflict in the region. Seventhly, Saudi Arabia reported a downturn in their economy due to revenue losses from lower crude oil exports. Therefore, a potential for Saudi Arabia to possibly increase production or offer discounts on crude oil prices to increase revenues is on the table for the first time in years. And lastly, today the government released jobs data which new jobs added as well as the unemployment rate. Job hirings increased at a greater pace than expected, even though firings increased. And in addition, surprisingly the unemployment rate dropped. The traders aboard the bears’ ship passed the bull’s ship again and WTI crude prices collapsed this morning. The drop has spooked a lot of traders to change position on a March FED rate cut. Therefore, if rates stay higher for longer, crude oil prices should continue to experience downward pressure from a stronger dollar. In conclusion, a LOT of data was released this week. Crude oil prices will report a loss for the week. Even though the data is extremely foggy, the trader’s on the bears’ ship passed by the bulls without any accident. A potential for crude oil prices to drop below $70/barrel is back on the table.
In local news, Chicago spot market prices skyrocketed yesterday due to Bp’s Whiting refinery going offline. The Whiting refinery is the largest refinery East of the Rockies refining about 500k barrels of crude oil per day. Bp is not releasing much information other than a possible power outage. The bad news, is that refineries can take anywhere from 5-14 days to regain full production. Therefore, I expect to see retail prices at the pump for both gasoline and diesel increase in the coming weeks. However, the increase in price could be short lived.
Propane prices increased this week even though crude oil prices dropped. On Wednesday, the EIA reported a second straight week of massive drawdowns in national propane inventories. The drawdown comes on the back of cold weather and massive exports. EVen though temperatures are looking to be warm in the coming weeks, I do not see propane prices dropping considerably. The appetite from Europe for propane exports is extremely robust due to the Red Sea conflict and the inability to purchase cheaper propane from Saudi Arabia. Even though the weather looks to be warmer, I always like to remind our customers to keep their driveways clean and have a clear path to their propane tank in order to ensure a safe and efficient delivery.
As always, if you have any questions, comments, or concerns, please feel free to give us a call.
Best regards,
Jon Crawford
Up, Up, And Away!
Good morning!
Happy Friday! WTI crude oil prices climbed to the highest price in months. WTI price broke through the $75/barrel ceiling and is looking to close above $75/barrel for the week. In addition, futures on WTI prices are moving higher. The GDP for December was higher than expected and the US economy surpassed China as the largest economy in the world. The news really fed the bulls that the US economy continues to run full-steam ahead. In addition, the EIA petroleum inventory report showed a massive draw in crude oil inventories continuing to support increased demand. And with the Red Sea conflict rerouting ships, Europe has placed more orders with the US and Brazil for crude oil, refined products, and LNG. And the US Embassy was attacked again my Iranian backed rebels. Also, Ukraine attacked a Russian petroleum exporting terminal supporting fear of further fall-out with the war in Ukraine. And the UN failed to pass a resolution forcing a ceasefire in Gaza. Instead, the UN is asking that Israel be more careful with their tactics and military actions. All of the data this week would usually support the bullish narrative. But as I like to say, the devil is in the details. China is an absolute mess. Their economy is hanging on by a thread as the government tries to bail out a real estate disaster and a collapsing stock market. The US consumer is continuing to spend like a drunken sailor, but the spending is mostly on credit. Credit debt payments are starting to stack up and defaulting, supporting the narrative that the consumer is under economic stress and storm clouds are on the horizon. Also, the oil industry in North Dakota shut down last week due to the cold which took almost 1M barrels/day of crude oil production off the market. The loss of US production was a more realistic reason for the massive drop in US crude oil inventories as opposed to increased consumer demand. Also, Saudi Arabia continues to use the Red Sea for their shipping routes pouring cold water on the report that Europe will lose all access to petroleum products through the Red Sea corridor. And Russian crude oil is still flowing in the open market. Therefore, at the 20k foot level, I see more potential economic headwinds not only in the US economy, but also in China. And, I could see an economic slowdown in the US spreading to Europe. However, the US and OPEC+ show no signs of wanting to cut production furter. Therefore, as the IEA is suggesting, a potential for a surplus in world crude oil production beginning sometime in Q2 of 2024 is starting to take shape. A possible scenario is WTI price riding the current bull-wave higher and possibly break through $80/barrel and then collapse in Q2. How low could crude oil prices collapse? Well, that depends on how oil producing countries react to the markets and how low crude oil prices fall. I do see a potential for a collapse in WTI price back below $70/barrel, possibly even hitting $65/barrel. But if that happens, oil producing countries will start to make moves to try and bring prices back higher. In conclusion, I am not buying the news and hype of higher crude prices for longer at this moment. I feel it’s best to be patient and stomach through Q1 and see what Q2 brings.
In local news, Chicago spot prices followed crude oil prices higher. However, the price movement was minimal in percentage when compared to how high crude prices rose. Therefore, I do not see retail prices at the pump for gasoline and diesel changing much going into next week. Demand in the Midwest market will also decline as warmer temps look to hang around in the coming weeks destroying a lot of the winter tourism travel.
Propane spot prices followed crude oil prices higher at a greater percentage in comparison to gasoline and diesel. The EIA report showed a draw in national inventories three times higher than anticipated! However, propane production slowed due to the extreme cold and exports remained strong as Europe moved more orders to the US due to the Red Sea conflict. Although warmer than normal temperatures are in the forecast for the following week or two, February is always a wild card. The cold snap in January was not predicted back at the end of December, so anything can happen in February. As a reminder to all propane customers, please keep your driveway clean and have a clear path to your propane tank to ensure a safe and efficient delivery. 🙂
As always, if you have any questions, comments, or concerns, please feel free to give us a call.
Best regards,
Jon Crawford