Temporary Floor – Chicago Glut Gone For Now

Good morning,

I hope this message finds everyone safe and well.  Crude oil prices are hopefully carving out some support to keep from falling into single digits or negative territory.  Oil companies are beginning to finally cut production here in the US.  In addition, oil companies are starting to do what I feared: cutting dividends.  Shell announced a slashing of their dividend for the first time since WWII!  The inventory report this week showed that maybe we have peaked in production and finally slowing down on building of inventory.  The FED continues to put out offers for helping the economy which also help support oil prices.  We are also seeing a slight, and I do mean slight demand pick up on gasoline which shows that people are slowly starting to move around.  But I am not confident that oil prices will go much higher.  We are not out of the woods by any means.  So many oil companies burned through cash and restructured debt from 2018 hoping for the payoff in 2020.  Well, that’s not going to happen.  I imagine that bankruptcies and depressed oil stocks will continue through summer.

In our local market, gasoline cost has risen over 45 cents/gallon since the beginning of April.  Do not believe what you read in the papers.  Gasoline prices will not be staying under $1/gallon.  The glut of gasoline supply in Chicago is now gone and market economics have balanced accordingly.  The retail cost of gasoline is well above $1/gallon.  I expect to see gasoline prices rise to almost $1.49/gallon in the coming week.  Diesel cost has also risen by almost 30 cents/gallon.  I expect to see diesel retail prices move up a bit in the coming weeks as well.

Propane continues to be a wild card.  Exports diminished for the first time in weeks which helps building local supply, but as price of crude rises, propane price will also start to rise.  There are a lot of chicken and the egg scenarios in propane.  Right now inventory levels are not great, but they are not terrible.  The main concern is Canadian rail propane.  In years past, the US has been well supplied by Canadian propane.  That does not look to be the case in the coming year.  Therefore, we will be heavily dependent on the ability of the US cavern storage to meet consumer demand in 2020/21.  I believe that the price on propane today has the potential to be the lowest price of the year.  I am recommending that people fill up now if they can.  Contract pricing will be coming out soon.  I know for certain that next season’s price will be lower than this season.

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

Best regards,

Jon Crawford

First Time for Everything

Good afternoon,

I hope this message finds everyone safe and well.  The past five days have been the craziest trading days I have experienced since the run-up in price of 2008.  Since March, crude producers and refiners in America ceased to stop production of product.  I think many felt that something would give in the coronavirus pandemic, OPEC would save the day, or Trump would purchase a massive amount of products for the US Reserves.  Unfortunately, none of these events came into play and by the end of April, many traders were starting to hold paper contracts for May with nowhere to sell the product.  I wrote last week that strange things might happen with expiration of the May futures contract.  I don’t think anyone thought we would experience what happened.  The day before the expiration of the contract, a ton of May delivery contracts were sitting out there with no home for storage.  As the contract price of WTI collapsed, I thought, “will the contract go negative for the first time in history?”.  Well, it did.  Once the contract went to -$0.03/barrel, I took a snap shot on my phone to mark the occasion.  But then the contract went to -$0.63, then -$1.44, then -$2.56, then $-5.22, all the way to -$38.46/barrel!  The WTI contract has never traded negative since the beginning in 1983.  What this means, is that any trader holding May crude contracts was going to have to PAY someone $38.46/barrel to take the crude.  The losses were unimaginable.  But in my opinion, totally explainable and rational.  American producers did not cut as fast as they needed to.  For whatever reason, they gambled and lost.  I believe these were all calculated business decisions that unfortunately needed to happen to force the industry to slow down.  Once the June contract started, the market started to re-balance.  And now on Friday, we are back to some sort of equilibrium.  But don’t hold your breath.  WTI crude prices are one large bad trade away from collapsing again.  Until we see demand pick up in the country and the rest of the world, crude oil will experience the most volatile times in trading history.

In local news, last week I talked about not getting too used to gasoline retail prices under $1.00/gallon.  Well, it’s over.  Based on gasoline costs, by the end of next week, Wisconsin should be back above $1/gallon on gasoline.  Gasoline prices shot up almost 30 cents this past week as the Chicago spot market gave up it’s differential advantage to the Group.  Diesel retail prices remain low in our market, but Chicago differentials are cheap compared to the Group.  So just like with gasoline, sometime in the next couple weeks, diesel costs will probably jump dramatically in our market.

Propane prices are continuing to rise since the lows hit in early March.  I have been telling everyone that the time to fill your tank is now, not in the summer.  If crude prices stay low, there will be very limited production of propane which is going to cause propane prices to rise even further.  There is a possibility of supply reliability going into fall depending on how much production is cut in the US and Canada.  For now, I suggest that everyone fill their tanks and wait for contract prices this summer.  Do not fall into the trap that lower crude and gas/diesel prices mean cheaper propane is on the way this summer!

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

Best regards,

Jon Crawford