We have a lot of important ground to cover today, so let’s dive in.
INVENTORIES: Propane built 2.4M/bbls this past week, more on that in a minute. For me, the biggest ‘news’ from the report was the 8M/bbls build in crude oil inventories…that is a MONSTER build, when the market was looking for a build just under 2M/bbls. When you have this on top of what I will write about in greater detail below, you are set up for a sell off day in crude oil…the markets are reflecting this, off as much as $.80 cents immediately following the release of the report, but rallied back to being down less than $.40 cents at the time of this email.
Back to propane…The 2018 build season has reached its traditional end with this report, and inventories are at 78.7M/bbls, which is roughly 700,000/bbls ahead of where we were one year ago this week…so at the finish line and despite running in a year over year deficits for most of the spring and summer, and a huge deficit five weeks ago, 2018 surpasses 2017..but in my opinion, there is likely LESS purity propane in the storage caverns this year than last year because of refining capacity (containment) issues, but the market has no way to account for that unless we hit a ‘too late’ scenario this winter, where strong demand would draw down inventories to the point where we would then know we are shorter than we think.
Propane exports remain strong, as expected, while propane production remains near record highs, as expected; the second time we have topped 2M/bpd in production!
PROPANE BITS & PIECES: The long-plagued Mariner East II (ME2) pipeline has hit yet another regulatory delay. Last year, a lot of propane that was slated for ME2 transport made its way to Conway via unit trains…there is a lot of propane production in that corridor, and it has to find a home…it would seem like some of that gas will be making its way to Conway and MTB again this year, but we have containment issues at both hubs…so some of that could get stranded in the Northeast, with a possible price depression associated with it.
PROPANE PRICES DIP BEFORE INVENTORIES: The Far East propane trading index was hit hard overnight as a Middle East based propane cracker went down…MTB values were off several cents because of this in early trading, but the volume was very small…however, it will likely impact today’s eventual closing average. Just another reminder that propane is truly a global commodity and what happens across the world impacts us here in the United States.
This is the big section today. Just 10 days after OPEC+ met in Algiers to discuss near term supply strategies, energy ministers from the world’s top exporters met in Moscow to discuss…supply strategies.
Whereas 10 days ago, OPEC+ said market supply and demand were in balance, today, they are signaling they could/will raise production outputs.
SAUDI ARABIA: The Saudi’s plan to raise production in October to 10.7M/bpd (which would be near all-time record highs), which an increase of roughly 300,000/bpd to 400,000/bpd. The Saudi oil minister said the recent price run up in crude was driven by the financial markets, and not market supply and demand fundamentals.
“We’re meeting every single demand for barrels,” Saudi Oil Minister Khalid Al-Falih said in Moscow. “We’ve increased production quite significantly. We just have to be responsive to demand”
I can’t say that I disagree, as I often write about ‘following the money’ as hedge funds have flooded back into crude net-long positions over the past five weeks. Their rationale for doing so is because of supply fears over the upcoming November deadline issued by the United States for foreign countries to reduce their Iranian crude imports to zero…which the markets saw as a loss of roughly 2M/bpd if the ‘to zero’ strategy materialized. However, 2M/bpd is a lot of supply, so I get the market jitters.
RUSSIA: They have said they are prepared to increase production by as much as 300,000/bpd, which would be on top of the post-Soviet era high of 11.36M/bpd they pumped last month. Russian President Vladimir Putin blamed President Trump as much as anyone for the run up in crude prices.
“President Trump considers that the price is high; he’s partly right, but let’s be honest,” Putin said, “Donald, if you want to find the culprit for the rise in prices, you need to look in the mirror.”
Putin laid out his thoughts behind the current crude bull run:
Current prices are “largely the result of the current U.S. administration — these expectations of sanctions against Iran, the political problems in Venezuela,” Putin said. “Look at what’s happening in Libya. The state is destroyed. It’s the result of irresponsible policies which have a direct impact on the world economy.”
Again, it’s hard to argue with the nuts and bolts of Putin’s assessment (I am not saying I agree with his using the term irresponsible, rather, the impetus behind the market rise). Headline risks have been driving crude, but the Iran sanctions have offered more than just headline risks; you begin to meddle with with artificial impacts to supply and demand beyond just standard economic stability and demand side factors, the market is going to react more emotionally…and it has.
What remains to be seen is whether or not these words and ‘pledges’ will have a LASTING impact on the trading markets, or any impact at all. In the hours before the EIA report was released, crude was trading as much as $.35 cents below yesterday’s close.
We ‘could’ see a period of digestion before direction, where the traders and hedge fund managers circle their wagons and reassess their strategies. But one aspect that looms in the shadows (for now) is just how much closer these moves push the globe to using up its collective spare crude oil production capacity. That’s not a ‘peak oil’ scenario, because Iran has capabilities that are being artificially squelched. But moves like these pushes the supply and demand balance into a more volatile place, as long as the Iran sanctions are in place.
Also, consider a scenario where the United States and China come to an agreement on trade and stand down on the trade war…the markets would see that as a bullish factor and it would likely put upward pressure on crude oil prices in the face of global crude production being pushed into the redline.
It just seems like the global markets are being funneled into an untenable position, when you also factor in political machinations. It’s clear that President Trump wants to see crude oil prices lower heading into the midterm elections. He also wants what he believes are fairer trade arrangements with China. A protracted trade war with China would likely escalate a global economic slowdown that would produce a pull on crude prices to the downside, but…you have a global economic slowdown, which could prove to be bad for the US economy, which would in turn be bad for 2020 political aspirations.
A resolution to the trade war with China (who has reduced their imports of US crude oil to near zero, by the way) would provide an emotional boost to the global economic outlook, and like spur a rise in crude oil prices.
Games within games and schemes within schemes, and the prices you pay for propane are caught in the middle.
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