Happy Friday!
It was a roller coaster week in oil markets, and it ended on an unexpected note of hope. A source in Pakistan said Iran’s top diplomat was expected to arrive in Islamabad Friday night for peace talks with the United States, and that single piece of news was enough to calm a market that had been beaten up all week by bad headlines. Oil prices swung sharply throughout the week, with WTI bouncing between the high $80s and low $90s a barrel, while Brent crude crossed $100 a barrel for the first time since the war began. The Strait of Hormuz is still closed, and one diplomatic meeting will not change that. But after a week of little good news, the market took what it could get heading into the weekend.
The ceasefire storyline was front and center all week. Monday started with the two-week pause in fighting set to expire and no deal to replace it. Iran’s president suggested both sides should explore every diplomatic option, which raised hopes. By Tuesday, there was real optimism that Iran and the U.S. would meet in Pakistan. They never showed up. On Wednesday, Iranian military boats fired on three cargo ships in the Strait, Iran’s Revolutionary Guards seized two more vessels, and the US also struck an Iranian cargo ship in the Indian Ocean. President Trump announced he was extending the ceasefire indefinitely regardless. Oil prices jumped anyway, because traders understood the announcement for what it was: a ceasefire on paper while the waterway stays closed is not a solution to the supply problem. Then Friday brought more confusion: Iran released video of troops boarding a ship inside the Strait, prices spiked, and then the Pakistan peace talk news hit and pulled them back down. To put the Strait situation in perspective, only five ships passed through it in the past 24 hours. Before the war started on February 28, the daily average was 140. Hundreds of ships and around 20,000 sailors remain stuck inside the Persian Gulf with nowhere to go.
The U.S. government’s weekly EIA report, released Wednesday, painted a mixed picture of domestic supplies. The country’s crude oil stockpiles grew slightly and are in reasonably good shape. The problem is in the refined products that consumers actually use. Gasoline supplies fell and are now slightly below normal seasonal levels. Diesel supplies fell further and are now 8 percent below where they should be for this time of year — a real concern with spring planting season about to drive demand higher. Demand for jet fuel is running more than 6 percent below last year, which reflects airlines canceling routes they can no longer afford to fly. U.S. oil producers, despite making strong profits at current prices, are not rushing to drill more wells. The industry spent years convincing investors it would spend carefully, and that mindset does not change overnight even when prices are high.
On the policy front, President Trump extended the Jones Act, a rule waiver this week that allows foreign ships to carry oil and fuel between U.S. ports, pushing the extension through mid-August. The move helps keep domestic fuel supplies moving while the global disruption continues. In Europe, a major oil pipeline from Russia briefly came back online after months of being shut down, which was welcome news for some countries. At the same time, Germany lost access to a different oil supply through that same pipeline after Russia cut off Kazakhstan’s exports through the line. Europe’s energy situation remains complicated and fragile. Separately, Reuters reported that the Pentagon is considering suspending Spain from NATO, which, if it moves forward, could add yet another layer of uncertainty to energy security across Europe.
The Federal Reserve’s future took center stage in Washington this week as Kevin Warsh went before the Senate for his confirmation hearing to become the next Fed chair. He promised to act independently and gave no hints about where interest rates are headed, which was about what markets expected. Fed policy has a direct impact on energy prices since crude oil is traded in US Dollar. More revealing was data showing that inflation in the United Kingdom rose to 3.3 percent in March, up from 3.0 percent in February — the first clear sign that the war’s impact on energy prices is showing up in everyday consumer costs overseas. Expect similar pressure to build in the U.S. in the months ahead. Airlines put the economic struggle in plain terms this week. Alaska Air said it cannot predict how bad its losses will be in the coming quarter because of fuel costs. American and United Airlines said the same thing. When the country’s largest airlines cannot plan their own businesses, that is a sign of just how much disruption the energy crisis is causing across the broader economy.
The Chicago-area fuel market held up relatively well this week, with local price differentials staying stable even as national crude prices swung wildly. That said, I expect both gasoline and diesel prices to move higher heading into next week. Farming season is almost here, and diesel demand is about to climb sharply. Without any progress on reopening the Strait, May could be a painful month at the pump for anyone running farm equipment. Diesel could easily push back above $5 a gallon if crude prices tick up or any supply hiccup occurs.
Propane is now following the crude oil trade. After a long stretch of calm, prices are starting to drift higher as they begin to follow crude oil more closely. The good news is that a solid inventory build was reported nationally this week, and if that trend continues through spring, there is a reasonable chance prices soften slightly over the summer. Propane is still the most affordable energy option out there right now by a wide margin, and that has not changed. Summer fill opportunities remain available, and I would encourage customers to take advantage of them while they can. Watch the peace talks closely — any real progress toward reopening the Strait could pull crude prices lower and create a brief window to purchase propane at lower prices.
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
