Happy Friday!
What a week. Oil touched its highest price in four years on Thursday when WTI briefly spiked to $112 a barrel on fears the United States was preparing a new military strike against Iran, only to pull back sharply today after Iran sent a fresh peace proposal to Pakistani mediators. As of this afternoon, WTI has fallen back toward $102. That is still a large range for a single week, and it shows exactly what this market has been — volatile moves in both directions, driven entirely by geopolitical events and announcements.
The week started with a setback. Trump canceled his top envoys planned trip to Islamabad over the weekend after Iran’s Foreign Minister Araghchi left Pakistan before any direct talks could take place. Trump blamed the lack of structure in Tehran’s leadership. Monday brought a new Iranian proposal: reopen the Strait, end the war, nuclear issues set aside for now. Washington rejected it. Trump made clear the naval blockade stays in place until a full nuclear deal is reached, not just a strait deal. That gap between what Iran is offering and what the US is demanding has defined the entire week.
By Tuesday, the pressure on Iran’s side was becoming impossible to ignore. The US Navy blockade, in place since mid-April, has cut Iranian oil exports by roughly 70 percent. Iran is running out of places to store what it cannot sell, with analysts estimating only 12 to 22 more days of available storage capacity. Once that runs out, Iran will likely have to slow or stop pumping entirely, potentially cutting another 1.5 million barrels a day by mid-May. The UAE added to the pressure by officially quitting OPEC on May 1, ending more than 50 years of membership. OPEC just lost its third-largest producer, and one with significant spare capacity. The UAE has made clear it plans to pump whatever it wants whenever the strait reopens, targeting 5 million barrels per day by 2027. That is nearly double its recent OPEC quota! Some analysts are watching Kazakhstan closely as a possible next departure. A looser OPEC with less coordinated production control means more price swings ahead once this crisis ends, but there is a greater chance of lower prices than higher.
On Wednesday, an investigation found that Iran’s Revolutionary Guard Corps has quietly taken control of the country since the war began. When Supreme Leader Khamenei was killed on the first day, his son Mojtaba stepped in but largely approves decisions rather than drives them. The real power sits with a small group of IRGC generals who have their own financial resources and are far less concerned about Iran’s struggling economy. That matters a great deal for negotiations. The people now in charge of Iran are not the people most eager to make a deal, and every day of stalemate tightens the supply crunch further.
Thursday was the day the market came closest to breaking. A report that US Central Command was set to brief Trump on plans for a short, intense wave of airstrikes on Iranian infrastructure was released. WTI rocketed to $112, a level not seen since the months after Russia invaded Ukraine before pulling back to around $108 once no announcement followed. Jerome Powell’s final Fed meeting as chair also took place Thursday. The Fed held rates steady for the third straight meeting at 3.5 to 3.75 percent citing inflation from energy as the number one concern.
Today’s news out of Iran brought the first major market relief of the week. Iran’s new proposal reportedly includes more specific language around the strait than previous offers, along with a ceasefire and an offer to deal with nuclear issues separately at a later date. WTI dropped almost $4 on the news. Trump responded by reiterating that the blockade stays until a full nuclear deal is in hand. The gap is still wide for a deal, but Iran sending a revised proposal after a week of escalating military pressure is at least a sign that both sides are still talking.
The Chicago spot market had an extraordinary week that I need to address directly, because it was driven by factors beyond just the Iran war. Diesel prices climbed almost $2 a gallon in a short period of time, setting a record for the fastest price increase we have seen in the Chicago market. Three refineries are currently in turnaround maintenance. One refinery lost a coker unit, which took out roughly 20 percent of its capacity and is likely to be offline for months. Another lost power. The combination of the Iran-driven crude price surge and these simultaneous local refinery outages created a short squeeze that pushed prices to levels I do not see coming down quickly. I expect gasoline to be near $4.50 a gallon and diesel near $5.50 a gallon to persist for some time, possibly through the end of May. One refinery is restarting and prices pulled back a bit today, so hopefully we have seen the peak, but I would not count on it just yet. Let’s keep our fingers crossed that the refineries in maintenance come back online without any additional hiccups.
Propane prices found their legs this week. Futures and spot prices all moved higher, and inventories experienced a surprising draw on Wednesday driven by a new record in exports. I do not expect exports to slow down any time soon, and that changes my summer fill outlook somewhat. I am no longer confident we will see significantly lower prices for summer fill compared to where we are for price today. That said, I still expect next season’s heating contracts to remain under $2 a gallon. The bigger picture on propane inventories remains very favorable. Inventories are over 65 percent higher than this same time last year and over 35 percent higher than two years ago. Even with record exports, there is an extremely low scenario in my opinion where propane faces the kind of short squeeze we are seeing in diesel. Propane remains by far the most stable and affordable energy product in this environment, and that story has not changed.
As always, if you have any questions, please feel free to give us a call. Have a great weekend!
Best regards,
Jon Crawford
Sources: Bloomberg, Reuters, Wall Street Journal
