T. Boone Pickens, energy billionaire and general raconteur, believes the world is headed back towards $90 to $100 per barrel crude oil, saying “the world got along fine with $90 to $100 crude.”
Pickens said that less global demand was the reason for the drop in crude oil prices, not oversupply. He also adds that there will be a reduction in supply in the US as rig counts are already down nearly 100 in three months.
As we have discussed in recent weeks, I believe the future of propane pricing is mostly reliant on what crude does. With natural market fundamentals, I think the market has a chance to move higher well in advance of 12 to 18 months. I think we could see some upward pressure this summer. Why?
THe aforementioned rig counts dropping in the United States will see a drop in domestic production. Oil stockpiles will drop or not be as robust. The summer driving season could be crazy with gasoline prices at these levels (my wife is already asking me about road trips this summer because of falling gas prices!) but refineries are already redlining…rig counts will be what to watch in crude and those will keep dropping.
So crude oil is going to go back up…the ‘when’ is the thing.
In propane, we are likely to come out of this winter with inventories at record high levels…it seems almost a given at this point. Storage costs will go through the roof for propane and the wet barrell market will be fascinating to watch, where ANY barrells will likely trade at a premium to wets because of storage concerns and costs. We could see a significant contango in place where the outmonths carry incredible premiums to the inmonths. This happened a few years back as you may recall.
Right now, we have a $.1300 cent spread between our December 2014 number and our 4Q15 number, and two more cents higher than that for 1Q16. The spread is $.1000 cents in Belvieu. Could this blow out to $.2000 to $.3000? It did a few years back…and again, people are going to want to buy the outmonths to avoid the storage hits that will be coming to roll barrels from month to month, which is what is preferred when markets are backwardated…contango is the opposite of backwardation.
The next question is; are these good values to own? I think they are as far as cost averaging is concerned…layer in smaller pieces this year and more of them. It’s very hard to imagine a lot of downside risk at these levels….and crude oil could move back the other direction before the supply is taken care of, as geopolitical unrest can take care of that in a hurry. In fact, falling crude oil prices like this can be THE CAUSE of geoplotical unrest, as economic hardships hit countries whose economies are so closely entwined with petrodollar revenues.
My amatuer prediction? We’ll see crude oil get somewhere in the $40’s and then some sort of geopolitical crisis will hit (perhaps contrived from a world leader whose economy is already failing), shale rig counts will continue to drop in the United States and production will tank…and crude will be on the march to higher levels. Cost averaging over the course of the next several months can help you level the playing field.