There is a lot to unpack in todays update. At the beginning of December, we saw steady drops for an extended period. Mid-December is when the swing started to occur, and the bulls stayed strong until Christmas. The last few days have finally shown a pullback. Will this last? Hard to say as there are so many conflicting reports, both geopolitical, and local. The market was in the red earlier this morning but that is changing already, at the time of this writing both distillate and gas are up over $.02 cents. This could just be short covering going into another holiday weekend.
The story for the bulls has many fronts, of course the ongoing Israel-Hamas conflict. On Tuesday of this week Israel’s Chief of Staff said the war in Gaza will go on for months. This provides strength for crude with fear of supply disruptions, and concerns of the war spreading to a regional conflict, and in some ways that is already happening. You have probably heard about Iran-backed Yemeni rebels attacking ships in the Red Sea. The Red Sea connects with the Suez Canal, a major shipping route used for about 12% of global trade. Many shipping firms were looking to reroute their tankers, which slows the supply and can result in higher expense to use other paths for delivery. Here at home the bulls have gained some support from signs of easing inflation. The most recent personal consumption expenditures (PCE) index showed inflation in November dropped below 3%, which has boosted expectations of Fed rate cuts next year.
In favor of the bears, record U.S. production levels, oil output in Russia, the third largest producer in the world, is expected to be steady or even increase next year as Moscow has largely overcome Western sanctions. Another country perhaps contributing strength to the bears, Angola. Angola recently announced their exit from OPEC. They seem unwilling to cater to Saudi requests to further cut back production volumes to fight off waning market prices. As a result, traders are viewing Angola’s defection from the oil producer group as a sign of discontent among members and could lead to less stringent output cuts leading to more supply. As mentioned earlier about rebels attacking ships, as of Sunday December 24th, there was confirmation of a multi-national security initiative, Operation Prosperity Guardian (OPG). This group has been deployed to allow maritime commerce to pass through the Red Sea/Gulf of Aden and return to using the Suez Canal as a gateway between Asia and Europe. This can certainly spark weakness to market pricing.
We do have contract pricing available for timeframes in 2024, if you would like quotes, please contact your Energy Account Manager.
The EIA numbers came out Thursday this week, delayed due to the Christmas holiday. Expectations were for a 1.88-million-barrel draw. Instead, the U.S. reported a 9-million-barrel draw, with 6.4 million barrels of that draw coming out of the Mid-West region. The agency said it discovered just before it published its latest report on Wednesday that Midwest (PADD 2) propane inventory was overstated in all reports issued from Nov 15th -Dec 20th, 2023. Note the steep dive in the graph below.
Has this affected pricing in the short term, yes, but for more than one reason. Colder temps are upon us, and end of year buyers jumping in to cover positions, which is typical towards the end of December. Anticipation is that the elevated pricing won’t last for long. It is stated that inventory levels are back on track and this news will be baked into the pricing equation. We do still have a few months ahead of winter, we have been lucky so far, if this weather trending continues, we could come into spring with levels still above the 5-yr average, which would bode well for market values.
We are still contracting LP for the current season, if you are interested in locking something down please contact your Energy Account Manager.
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