Happy Friday!
Crude oil markets ended the week in a position that may come as a surprise to those who have been watching the steady rally since the war began. Oil prices rose on Friday but are on track to end flat for the first time since the U.S.-Israeli war on Iran started. The reason came as President Trump extended his pause on strikes against Iran’s energy plants, giving markets a brief window of hope that a deal might take shape. Even so, crude prices remain well above normal levels. WTI hovered between $95-100/barrel, and the overall supply picture has not gotten much better. The International Energy Agency has described the current crisis as potentially worse than the two 1970s oil shocks combined, with roughly 11 million barrels per day pulled from the global market.
The back-and-forth around Iran diplomacy moved quickly this week, though the situation remains far from clear. On Tuesday, Iran’s military flatly rejected President Trump’s claims that the two sides were in talks, putting out a statement that all shipping to and from ports of U.S. and Israeli allies remains banned through the Strait of Hormuz. The Islamic Revolutionary Guard Corps left no room for doubt, and the statement pushed crude prices higher as traders adjusted their expectations for a quick end to the conflict. By midweek, though, the tone started to shift. A 15-point U.S. ceasefire proposal, passed to Tehran through Pakistan, came to light. Iran said it was reviewing the plan, though an Iranian official called it one-sided and unfair. Trump said talks were going very well, though go-betweens and reporters questioned whether real negotiations were actually happening. Trump has not said who he is supposedly talking to on the Iranian side, where many top officials have been killed during the war.
On Thursday, Trump announced a new extension of his deadline for Iran to reopen the Strait of Hormuz or face the destruction of its energy plants, pushing the date to April 7. He said the pause was in response to an Iranian request, though Tehran gave no public sign of having made one. The move brought oil prices down briefly, but the market remains doubtful that a deal is close. Behind the scenes, go-betweens from Turkey, Egypt, and Pakistan are pushing for a face-to-face meeting between U.S. and Iranian officials, and Iran’s outspoken Parliament speaker, Mohammad-Bagher Ghalibaf, has come up as a possible contact point for Washington. Meanwhile, the fighting continued to pick up in the region. Israel announced it killed the commander of Iran’s Revolutionary Guard navy, the person reportedly responsible for mining and blocking the Strait of Hormuz. The Pentagon is also looking at sending up to 10,000 additional ground troops to the Middle East. The Strait of Hormuz remains closed for all practical purposes. A report this week said that roughly a dozen Iranian naval mines are now sitting in the waterway, making any reopening effort even harder. Several U.S. allies continue to turn down Trump’s request for military help to clear the strait. France said it held talks with around 35 countries about a possible mission to reopen the waterway, but only after the war ends. The UAE, which has taken more Iranian attacks than any other country in the region including Israel, is working with Bahrain on a U.N. Security Council resolution to give a future naval force the green light, though Russia and China could block the effort. The message from the rest of the world is clear: no one wants to send ships into the Strait while bombs are still falling.
On the supply side, some countries are starting to find workarounds while others are stockpiling. India announced it has locked in crude oil supplies for the next 60 days, boosting purchases from the Western hemisphere and taking advantage of a temporary U.S. waiver to ramp up Russian crude imports. As the world’s third-largest oil buyer, India had been getting over 40 percent of its oil from the Middle East before the war. Its ability to fill that gap, at least for now, is helping keep global markets from getting even tighter. But a worrying pattern is showing up across Asia and beyond. China, South Korea, and Thailand are limiting some fuel exports. Russia and China have stopped overseas sales of certain fertilizers. Philippine Airlines warned of jet fuel rationing in the region. The urge to hold onto supply is understandable, but countries hoarding fuel and fertilizer risk creating the very shortages they are trying to avoid. Cutting off fertilizer shipments is especially dangerous because higher input costs go straight into food prices, just as food inflation had started to cool after years of shocks.
U.S. economic data this week took a back seat to the war, but the EIA reported that refinery activity rose by 1.5 percentage points and crude oil inventories rose by 6.9M barrels. The numbers suggest domestic refining is picking up, though higher crude costs will keep pushing gasoline and diesel prices up at the pump. Even as the US continues to try and export as much oil as possible, demand is possibly starting to flatline in the US and in other countries. The U.S. dollar, meanwhile, is on pace for its biggest monthly gain since July. A strong dollar has helped limit bigger crude oil price spikes but also adds to inflation pressure around the world by making oil and food more expensive for foreign buyers.
Looking ahead, the April 7 deadline is the next big moment to watch. Either Iran makes real moves toward reopening the Strait, or the U.S. follows through on its threat to hit energy infrastructure. I expect crude prices to stay elevated and very volatile to every headline until there is a real path to reopening shipping through the Strait of Hormuz. Even in the best-case ceasefire scenario, the world oil market would not turn around immediately. The work of clearing mines, restarting production, and moving the backlog of ships means it would take a long time for supply to get back to normal.
The Chicago spot market moved to the May prompt contract without much change in differentials. With the Chicago spot market running at an incredible discount to the NYMEX, wholesalers were worried about a potential rise in differentials when the April contract expired. Prices for gasoline have swung back and forth with 10-50 cent per gallon moves. The frequency and wide range of price moves made retail pricing very difficult to manage. The overall trend has been down a bit, but I don’t expect to see retail prices fall too much at the pump. The price changes are just too volatile to manage.
Propane prices have started to move a bit higher along with crude oil prices. I do not expect to see a price change at retail in the coming week or two. However, propane prices will be moving to summer contract trading in April. National inventories are keeping larger price moves higher in check. National propane inventories are up 60% over last year and the 5-year average. And the Midwest is sitting on an incredible high level of inventory. As of right now, the Midwest inventory of propane is 60% higher than last year and 40% higher than the 5-year average. I expect propane prices to trade in a narrow range coming out of winter unless crude oil prices surge to $125/barrel and beyond.
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
