It’s EIA Wednesday, and the report ending the Week of June 1st showed a 4M/bbl build. I will write more on that a little later, but here are my instant thoughts on the significance of this build. Hint; I am still bearish on propane prices for the back half of 2018:
Crude oil also showed a significant build in its stockpiles domestically, and as such, WTI crude is currently off over a dollar/bbl and is now down below $65. Propane is going to follow, as I have been writing about the last few weeks.
PRIVATE ENTITIES FOLLOWING US LEAD ON IRAN SANCTION? It seems that while the governments of several European nations are not joining the United States with a new round of sanctions against Iran following America’s withdrawal from the Obama-era nuclear accord, a number of key businesses within those nations are not taking any chances of risking American economic blowback. Here’s the lede paragraph from this Reuters article:
European refiners are winding down oil purchases from Iran, closing the door on a fifth of the OPEC member’s crude exports after the United States imposed sanctions on Tehran, company and trading sources said.
Then, more from the linked item:
Although European governments have not followed Washington by creating new sanctions, banks, insurers and shippers are gradually severing ties with Iran under pressure from the U.S. restrictions, making trade with Tehran complicated and risky. U.S. President Donald Trump on May 4 announced his decision to quit a landmark 2015 nuclear deal between Iran and world powers and reimposed sanctions on Tehran. The sanctions on Iran’s petroleum sector will take effect after a 180-day “wind-down period” ending on Nov. 4. “We cannot defy the United States,” said a senior source at Italy’s Saras, which operates the 300,000-barrels-per-day (bpd) Sarroch refinery in Sardinia. Saras is determining how best to halt its purchasing of Iranian oil within the permitted 180 days, the source said, adding: “It is not clear yet what the U.S. administration can do but in practice we can get into trouble.”
WHIM (What it Means): Politicians can posture, but private business entities have their own agendas, and the business entities don’t want to get on the bad side of President Trump’s Iran policy. This, along with the drastic drops in Venezuelan production, will create a bit of pressure on global supply and demand balance in crude oil…that said, I believe OPEC (namely, the Saudi’s) and Russia will be more than capable of meeting the shortfalls, along with the production and exporting of American crude oil. Still, the loss of Iranian and Venezuelan production removes some margin for error in the marketplace, because any unforeseen supply disruptions in Russia or Saudi Arabia can move the market back to an uncomfortably tight spot.
D-DAY ANNIVERSARY: This isn’t political, and I won’t get political in this space. But on June 6, 1944, 160,000+ Allied troops landed at Normandy…More than 10,000 Allied soldiers were killed or wounded, but by day’s end, the Allies had begun liberating Europe.
I simply cannot fathom the courage it took to assault those beaches and heavily fortified positions…landing on the beach and seeing true scenes out of your worst nightmare…expecting death. It’s a miracle there were not more deaths. American soldiers entered the European theater in a big way, paid a big cost, but they tipped the balance of the outcome of war, they helped lead to the end of the murderous regime of Adolph Hitler and stopped his atrocities before they could worsen.
While most from this greatest generation have perished, as long as I draw breath, they will have my respect and my remembrance of the price they paid. Here is the letter then Gen. Eisenhower sent to the troops in advance of the Normandy assault.
Here are some things you might have missed from the world of energy, which I believe are worth being aware of as it relates to impacts on our propane industry…
OPEC WORST MEETING EVER, PART II? That’s the headline from a Bloomberg.com item over the weekend. From the item:
You know how, a few years after a Hollywood blockbuster gets released, it seems to get a remake? Well, it looks Saudi-Arabia’s oil minister Khalid Al-Falih is setting himself up to reboot his predecessor’s 2011 hit – “OPEC’s Worst Meeting.” His starting point is an about face. Al-Falih had said as recently as April that the group’s output cuts should be extended and the goalposts moved. But in what looks like a response to President Donald Trump’s April 20 tweet attacking the group, Saudi Arabia has gone from advocating higher prices to trying to stop the rally at $80 a barrel.
Al-Falih must now convince fellow OPEC ministers at their next meeting, on June 22, that they need to raise production. The parallels with seven years ago are clear. Then, OPEC had an output ceiling that had been unchanged for two and a half years and the kingdom saw clear signs that the market was overheating and required more oil from the producer group. Members such as Iran and Venezuela, who couldn’t boost their own production either as a result of capacity constraints or sanctions, rejected the Saudi proposal to raise output.
Since OPEC acts by consensus, this doomed the meeting to failure. The group could not even agree on the text of a closing press release and the Saudi oil minister called it “one of the worst meetings” he had attended in almost 16 years in the job. Roll forward to the present day and we have a very similar dynamic.
The entire item is worth your time…the stakes are high for this month’s OPEC meeting, to be sure…and we have a few weeks before it takes place, so it will be fascinating to watch the ride crude oil takes propane on in the coming days.
THE NEXT THREAT TO OIL PRICES; CHINA? That’s the headline from this Wall Street Journal article. Here’s the lede paragraph:
Oil prices have had a spectacular run, rising by nearly 50% since last July, thanks to a potent mix of OPEC discipline, geopolitical risk and strong demand. The rally has moderated in the past couple of weeks, thanks to concerns OPEC’s resolve on supply cuts is weakening just as U.S. oil production is showing renewed signs of vigor. What investors may not appreciate is that demand growth is also poised to slow in the world’s largest net oil importer last year, China. The overall trend for the industrial and transport sectors—which together account for about 70% of Chinese oil demand—looks shaky
Any economic slowdown in China is going to have a big effect on the global supply and demand balance for crude oil. I just see more bears than bulls in the crude market this ten seconds, which should have an impact on propane.
FOLLOW THE MONEY: hedge funds and other money managers have been cutting bullish position in crude for five weeks
Reduction started long before OPEC+ started to talk about increasing output
Pay attention to what people do, not what they say pic.twitter.com/diD9f33SHr
— John Kemp (@JKempEnergy) May 29, 2018
This is more than a couple of days old, but John Kemp tweeted this out last week and I think it bears watching. Particularly, his last sentence of ‘pay attention to what people do, not what they say.’ There is an enormous amount of speculative interest in crude oil, and more now in propane than we have ever seen before. Financial institutions are literally making bets on paper with product they never intend to take delivery of, because they cannot take physical deliveries of propane.
We saw a good deal of this, last winter, in propane. It’s one of the reasons why the trading markets at the hubs behaved so erratically and outside of expectations, given the cold we experienced from Christmas through the middle of January. The hubs were weakening and pulling back when the weather was at its coldest.
With the graphic and comments above, you can see that there have been growing sentiments amongst the financial folks that crude oil markets were getting top heavy, and they began to remove some of their long positions.
Can this turn around and go the other way? Yes, but I think the reason for the decrease in length had a lot to do with the Geopolitical (GEOPOL) turmoils we were faced with in April easing a bit on some important fronts. Seeing data like this only bolsters my bearish outlook. That said, this item from Bloomberg.com thinks an oil shock may be in the offing…I tend to think we’ve just experienced it and are beyond it.
— Javier Blas (@JavierBlas2) May 25, 2018
Again, another tweet from last week, and Javier Blas is the Chief Energy Correspondent at Bloomberg News, thus he is someone I follow closely. This tweet came from Friday, May 25th, right about the time when Russia and the Saudi’s were jawboning the markets, and we saw the price of crude top out on this day and is off over $5/bbl since then. A narrative has been set, and this month’s OPEC meetings are going to be interesting.
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My family and I are on vacation this week, but The Propane Buzz always has its eye on what is going on. Here is what I have seen from this weekend and today that I think would be of interest and or some importance to you as you begin your week…
CRUDE OIL FACES A MONTH OF MAYHEM AS GEOPOLITICAL RISKS ARE HIGH: That’s the headline from this Bloomberg.com article. Here is the lede paragraph: “Plunging Venezuelan crude production; sanctions disrupting Iranian oil exports; Saudi Arabia pushing for even higher prices; North Korea peace talks — the coming weeks bring an abundance of risks for the oil market.”
Fun times. This is a year, pursuant to propane contracting for the upcoming demand season, that will require a steady and patient hand and test the nerves of many.
This is a very good article for you to add to your reading list today, as there are a number of key factors at play right now that could push the markets higher, or if tensions ease, take things lower.
WTI IS HIGH: WTI crude values have topped $70/bbl in Monday morning trading, reaching three-year highs. Brent crude values are threatening $76/bbl as well. The WTI to Brent spread will help to keep the trading arb open for United States sourced propane exports, but I have heard of May export cargo cancellations. This is definitely something that deserves more monitoring.
CORN PLANTING: Corn saw a decent jump during Week 17, as seen in the chart below from Kevin Van Trump. At that particular point in time, compared with previous years, we still see the planting pace behind the five-year normal. Much of the corn belt saw a decent amount of rain last week, which will likely keep the 2018 planting season behind pace. There will be a USDA update late today that will provide an update to these numbers.
MARINER EAST 2: One year ago about this time, we were all hearing that the Mariner East 2 (ME2) pipeline, another line connecting the Marcellus Shale production with export markets in the Philly area, would be coming online in 3Q or 4Q….it didn’t happen, and thankfully so, as the Ohio Valley and Northeast needed all the extra propane in the fall and winter they could get.
I’m now hearing similar time lines for this year, and I think folks are taking it more seriously this time. Demand in the Ohio Valley and Marcellus has been very strong this month, with the cold weather, and propane values are firming up relative to where we began the month. IF…and this is a huge IF….IF ME2 does come online this summer, pricing in the region, and possibly even in Western Ohio and Eastern Indiana, could firm up.
This part of the country (Ohio & PA) has been an oversupplied propane market for the better part of two years. We could see things flip the other way, if some are to be believed, once ME2 gets rolling in earnest.
SAUDI’S PARTYING LIKE IT’S 2008: That’s the headline from this Bloomberg.com article. From the item:
Is this really 2018? It started to sound a lot like 2008 in Saudi Arabia on Friday, as the kingdom’s oil minister argued that the world could tolerate a higher crude price. “I haven’t seen any impact on demand with current prices,” Khalid Al-Falih told reporters at the meeting of OPEC and non-OPEC producers in Jeddah. Arguing that the energy intensity of global economic growth hadn’t declined, he offered the view that “there is the capacity for higher prices.
President Trump certainly didn’t appreciate the sentiment, firing off a tweet that accused OPEC of promoting “artificially high prices” which “will not be accepted.”
Yet setting aside Trump’s unique approach to geopolitics, the Saudi comments are indeed troubling. They are an eerie echo of comments made almost exactly a decade earlier by a former OPEC grandee: Libya’s Shukri Ghanem. The world economy “has not reached the tipping point where it can’t accept higher prices,” Ghanem said back in April 2008.
There’s a lot more to that article and it’s worth a read, and while the past is not always prologue, it never hurts to crack open the history book.
he Hedge funds are very, very long on their crude positions right now, so they are bulled up to near record levels. On the other hand, some crude traders I follow are wondering if the market isn’t ripe for a pullback. Technicals will not be able to accurately account for geopolitical risks, so keep that in mind. Here is one crude trader I follow who has a very good track record, and what she’s watching:
This paragraph from the Bloomberg article is perhaps the big takeaway:
When OPEC met in May, oil ministers were talking quite casually about $50 a barrel as a good price for crude. By the time of the December meeting, several were suggesting that a “fair” price for oil was $70 a barrel and at least one put it higher. Now that OPEC’s basket of crude has reached that $70 level, the target appears to have mysteriously moved upwards again. This is mission creep, OPEC-style.
Speaking of history, the dictates of crude oil prices typically impact the trajectory of propane prices. I began wholesaling propane in 1996, and this relationship has been very, very, very common during all of my years in the industry. There have been times when propane has detached from crude oil (I wrote about that last September) and we do see instances where one side of the other can dip into extremes.
But right now, we see the propane to crude ratio in a channel that fits into historic levels, even though Conway prices are at the lower end of that channel. I put together a graphic of the propane to crude ratio from the past year, overlaid with the path of daily average propane prices at the hubs over the past year. The solid lines indicate propane’s percentage to crude and you will use the vertical axis on the left to track that percentage. The dashed lines indicate the daily average price for propane, and you will use the vertical axis on the right to track that percentage:
You can see that on year ago this time, the propane to crude relationship was in the high 40 percentile range at Conway, and low 50 percentile range at Mt Belvieu. Note the July 3rd time frame on the chart, and you see that propane prices really began to make a run, while crude oil prices did not make a similar run…the propane to crude relationship was off and running and and reached into the 70 percentile range in early 4Q2017 and stayed there through the end of 2017. Then at the start of 2018, we began to pull back down into historic ranges, as propane values began to drop.
You can see that in March of 2018, propane prices had fallen a great deal and the propane to crude relationship at Conway was down in the low 40 percentile range, which is lower than the historic low end of the channel. However, crude has begun to make a run in recent weeks…a strong run…and while Conway’s percentage to crude is down around 43% right now and Mt Belvieu is in the low 50’s, propane prices are moving higher because crude is moving higher.
One could argue that propane prices have some upside risk in them based on the historic propane to crude ratio coming back in line, more so at Conway than Belvieu, but it’s dangerous to make assumptions based on the past.
Still, it would be folly to not pay close attention to the whims and drivers in the crude oil industry, if you are in the propane industry…as crude oil moves larger needles around the world than propane, and propane comes along for the ride (up or down) more often than not.
I still expect robust propane production this summer, because United States rig counts are at their highest levels in three years, according to Baker Hughes.
If I remove the geopolitical costs baked in to the price of crude right now, which I think is a good $5/bbl at a minimum, we’d likely see propane prices lower than where they are and back near levels we saw in March. However, we don’t get to parse such things out of the price and these geopolitical risks are with us for at least a few more weeks.
Crude is off nearly $1.00/bbl to begin today.
WEATHER: The ‘Spring Thaw’ is slow in coming this year…and the two major forecasting models are at odds over how soon the warm will come and stay. The following images are courtesy of BAMWx.com, and the image on the left is the European Model through May 7th, where the image on the right is the American Model for the same period.
Take a look at long-range (next month) this video from Michael Clark of BAMWX.com, shared with permission. For those of you who have agricultural dependent aspects to your businesses, it’s eight minutes well spent…Clark also talks about his expectations for summer temps, too.
MILITARY STRIKES ON SYRIA: Over the weekend, the United States was part of a coordinated set of military strikes on specific Syrian targets, along with the UK and France. This was in response to the alleged gas attacks on Syrian nationals last week by President Bashar al-Assad.
HEDGE FUNDS BUILD RECORD BULLISH POSITION IN BRENT CRUDE: From the article: “There are plenty of reasons to be bullish about crude prices, including strong growth in oil consumption, continued output restrictions by OPEC, disruption in Venezuela, and the threat of new sanctions on Iran. OPEC members have indicated they want to see a further rise in oil prices to stimulate more upstream investment and may be targeting prices as high as $80 per barrel, up from just over $70 currently.The latest position data refers to positions at the end of trading on April 10, before the United States and its allies launched air strikes on Syria in the early hours of April 14.Rising political and military tensions across the Middle East, including in Syria and Yemen, have created a speculative bid for oil prices”
NATURAL GAS INVENTORIES END SEASON AT LOWEST LEVELS SINCE 2014: This is something worth watching as more propane is derived from natural gas than crude oil. There was a draw of 2,427 Bcf on inventories this winter, which was the second-highest withdrawal on record behind the 2,958 Bcf of the winter of 2013–2014. That said, and based on increased production estimates for this summer, expectations are for Natural Gas inventories to peak near the five-year average once we hit October. This lines up with what I have been writing about in recent weeks, which is my expectation that we are going to see stronger than usual propane production this spring, summer and fall, which is one of the primary reasons for my continuing belief that we will see a pull back in propane prices. However, as long as geopolitical forces of tension persist, as they are right now, prices will struggle to drop by any significant measures.
SAUDI ARAMCO FINANCIAL NUMBERS ‘LEAKED’: For the first time, we get a look behind the veil of Saudi Aramco’s financial performance. While this particular item isn’t incredibly important to our industry, it’s pretty amazing to see the economic size of this private company, likely the most valuable in the world. Consider the combined profits of Exxon Mobil Corp, Shell, Chevron, Total and BP don’t add up to what Aramco did last year, and that is just a staggering revelation. What IS pertinent to our industry pertaining to Aramco, is the Saudi’s desire for crude oil values to remain firm or move higher, as you read above…so they can launch their IPO and sell off a portion of Aramco to global investors as the new prince of the kingdom wants to diversify their portfolio and become less dependent on oil revenues.
FREAKISH COLD WEATHER FOR APRIL
Much of the country has yet to experience much, if any, Spring, as cold weather and winter-like systems persist. Here are some random snapshots I pulled from twitter:
“Yesterday’s high of 31° in Kansas City shattered the previous daily record cold high (previous 41° on 4/15/93) and also sets a record for latest sub-freezing high (previous 31° on 4/9/73), with a trace of snow recorded as well”. – Radiant
“First half of April is the coldest on record for Minneapolis (-16.1° departure from normal) and is already the snowiest April on record (26.0″). The city has yet to see a low above freezing, and three days (Apr 6, 14 & 15) have set daily record cold highs”. – Radiant
“Before this year, Green Bay’s biggest April snowstorm was 11.0″ on 4/4-5, 1977, and it’s second-biggest was 10.3″ on 4/14-15, 1904. By comparison, Green Bay saw 11.0″ on Saturday and 10.2″ on Sunday, with another 2.5″ on Friday adding up to a record-shattering 23.7”. – Radiant
“High of 38ºF in Boston will easily break 1881 record low maximum temperature (40ºF) for the day. Coldest April 15th on record!” – Ryan Maue
The map on the right shows some temperature records that have been tied of set in recent days, all on the low side. Meanwhile, the American Southwest bakes…but the PAC NW is also experiencing below normal anomalies.