INVENTORIES: Propane checks in this week with a 600,000/bbl draw, with national inventories now sitting at 81.1M/bbls. This is compared to 73.2M/bbls one year ago this week.
Propane exports sat at 1.077M/bpd this week, so the big jump in exports last week was not an outlier…Conway inventories are at a robust 26M/bbls with the Gulf at nearly 44M/bbls, so there are not any alarm bells going off right now as it relates to propane inventory concerns, although the temperature outlook for December is very favorable for stronger than normal home heating demand through much of the United States. I sent out a weather update to Propane Buzz subscribers this morning that broke down the December outlook in great detail. If you’ve not yet given our month to month subscription a try, now is the perfect time to do so..and you can cancel at any time if you are not satisfied. Click here to sign up.
Crude oil built just over 3M/bbls, which was in line with last night’s API report. Crude is off slightly after the report.
The most recent propane trades are $.6800/Nov MTB, while Conway has not had any activity of note.
It just feels like the markets are waiting for some direction from OPEC with regards to what they will do, or not do, at next week’s meeting in Vienna pursuant to production cuts…let’s dive into that very, very important topic.
This next segment is a bit long, but I want to begin with this simple reminder; what impacts crude prices has an effect on propane prices…and the next 10 days could see a significant setting of market tone with regards to the future trajectory of crude prices and hence, propane prices. So stay with me, please.
OPEC Open to Risking Trumps Ire, Prompted by Budgets and Shale: This is from the WSJ, and goes along the lines of what I have been saying and writing in recent weeks; the Saudi’s have little choice but to spearhead a production cut. To hit their economic budget, an economy that is full of socialistic-style payments to its citizenry, they need Brent crude around $88/bbl and Brent is south of $60 right now.
American shale producers are not going to throttle back on their production until WTI values become low enough to make said production economically unviable. We went through this in 2014-2016, when OPEC’s strategy was to pump crude, unfettered, to bankrupt many of the upstart American shale producers.
That didn’t happen, because most of the shale producers tightened their belts and learned how to get by in a lower crude value environment. So the OPEC strategy from late 2014 blew up in OPEC’s face, and they relented, cutting production in very early 2016 through the first half of this year.
Then back in the spring, President Trump decided to withdraw the United States from the Iran Nuclear Accord, and said he was going to reimpose sanctions on Iranian crude…this sent a jolt into the markets and crude prices continued their steady rise, with Brent moving well above $80/bbl. President Trump also began a public ‘campaign’ of sorts, targeting OPEC+, saying they needed to pump more crude to lower prices.
When the Washington Post dissident journalist was killed this summer, at the hands of the Saudi’s, the Saudi’s certainly needed some international allies…and President Trump was able to get the production increases he was looking for, he was able to get a then secret commitment from the Saudi’s and Russian’s in late September to pump more crude, and beginning on October 3rd through current times, crude has lost all of its 2018 gains and prices are now off well over a third from their October highs.
Which leads us to this, from the article: “With crude prices down nearly a third in less than two months, officials in many OPEC countries say the need for collective action to halt the oil price rout outweighs the risk of riling a U.S. president who has publicly accused them of plotting to keep prices high. “It is in their economic self-interest to cut production,” said Helima Croft, chief commodities strategist at Canada’s RBC. Before the global benchmark oil price tumbled to nearly $60 a barrel, President Trump had bent OPEC and its allies into inaction over what to do about falling prices. But the strategy has hit a breaking point: For many OPEC countries, the price of oil is now far lower than what officials need to balance national budgets.”
You can see the national budget numbers in the graph I have inserted…again, Brent crude is trading just under $60/bbl right now, which is bad news for much of OPEC. You will also note where Russia’s ‘break even’ number is here, $53/bbl. This is why Russia has been less keen on a production cut.
The bitter pill for OPEC+ is that if they choose to cut production, the United States and its producers are poised to capture market share, as they will not be cutting production. This is capitalism vs a controlled cartel. The United States also looks to have another 2M/bpd of oil production capacity coming online over the next year, with additional takeaway pipelines to get that product from the ground to the ships. Again, this is an enormous challenge staring OPEC+ in the face.
Their choices are not favorable ones, from their point of view:
1) Don’t cut production and see crude values continue to plummet and all the havoc that wreaks within their countries
2) Cut production, stabilize crude prices, but cede market share to the United States, who is now the largest crude producer in the world and only growing in that regard.
Being that they already tried #1 back in 2014, they have a very recent reminder of the pain that goes along with such a choice. I just don’t see them doing nothing, again.
Choice #2 will bring with it President Trump’s ‘ire’, as the headline from the WSJ article suggests. For the Saudi’s, this is no small matter. Again, from the item
“The Saudis need to avoid offending Mr. Trump in particular because Riyadh fears U.S. sanctions over the killing of journalist Jamal Khashoggi by the kingdom’s operatives.” You can read more about the entanglements, drama and whatnot surrounding this aspect a little lower in this item…but the Saudi’s need friends right now, and President Trump has been that for them, publicly…and they fear him changing his course if they cut production.
Earlier today, I read an item where the Saudi’s are saying they will not cut production by themselves, that it needs to be a shared OPEC+ measure.
“We are going to … do whatever is necessary, but only if we act together as a group of 25,” Falih told reporters, referring to OPEC and its allies led by Russia. Moscow has so far resisted joining any new output cuts and Falih did not say whether he had heard of any change in Russia’s position. “As Saudi Arabia we cannot do it alone, we will not do it alone,” Falih said.
The Russian’s absolutely do not want to cede market share to US producers…this is all very fascinating and will absolutely have an impact on propane prices in the coming weeks, months and perhaps longer.
GAME OF THRONES…FOR REAL: My goodness, this read from the Washington Post re: the Saudi Arabian royal family reads like an episode of Game of Thrones, complete with kidnapping, alleged murders, plotting, secret surveillance, etc. It’s a bit unsettling at times.