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THIS WEEK'S TOPIC:
CRUDE INVENTORY AND PRICING

Cushing crude storage and gasoline demand
By MARK RACHAL
Cost Management Solutions    
Cost Management Solutions
Cushing, Okla., is a major storage and trading hub for U.S. crude. Futures for West Texas Intermediate (WTI), the U.S. benchmark, settle at Cushing. That makes the inventory situation in Cushing very important to WTI crude pricing. In fact, we would consider it more important than overall U.S. inventory.

Total U.S. crude inventory is certainly high. Last week, the Energy Information Administration (EIA) reported a 10.95-million-barrel build in U.S. crude inventory. That build was three times expectations. It put inventory at a modern-day record of 482.39 million barrels. It was the biggest one-week build since 2001.

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Cushing crude inventory only increased 1.2 million barrels, but it was still more than expected. However, inventory there is now at 85 percent of the estimated 70.1-million-barrel capacity at Cushing.

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Some analysts predict Cushing will reach capacity this summer and that if it occurs, crude prices will plummet, at least for a short period of time. Of course, plummeting crude prices have the potential to bring propane prices down as well.

However, other analysts point to increased U.S. gasoline demand as the reason the crude builds will slow and a max storage situation at Cushing will be avoided. If gasoline is in high demand, refineries will operate closer to capacity, increasing crude throughput and thus decreasing inventory builds.

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The weekly data on gasoline demand is erratic. But if we look at the year-to-date (YTD), the average demand has been 8.791 million barrels per day (bpd). The five-year-average YTD is 8.591 million bpd. Last year, YTD to this point was 8.451 million bpd.

Lower gasoline prices certainly have the potential to increase demand. The data above suggests it is already having an impact, but whether demand will be enough to soak all the crude that is so rapidly building crude inventory is tough to predict.


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Propane fundamentals are weak, just like crude’s. If that remains the same, there is no reason propane prices wouldn’t follow falling crude down, should that occur. Currently, propane prices are very good one, two, even three years out. It makes it very tempting to lock in a lot of supply. If we have customers ready to lock in prices so we can fix margin, there is no reason everyone wouldn’t be happy with propane purchases bought at current price levels. However, if we are speculating, meaning we do not expect to get customers to lock in their price, there is still downside risk.

The key in the current situation is to try and stay balanced. None of us can know for sure all the factors that could affect crude and propane prices in the future. We have to manage the risks as they develop. Not locking down some propane at current prices would be a huge risk. But locking down too much - given current fundamentals - would have a good deal of risk as well. The right move is to take some longer-term positions, but not get overbought and back yourself into a corner too early this spring, until the fundamental situation on crude and propane is more clear.


WEEK IN REVIEW

Doubts that the Iran nuclear deal will finally get done despite the promise of negotiations the week before last supported crude. Propane prices were pulled higher by crude. Fundamentals remain very weak for crude, and propane is keeping us neutral in our outlook for prices this week.

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LAST WEEK'S HIGHLIGHTS
Last Week's Highlights
Crude prices surged more than 6 percent, pulling propane prices along for the ride. A weaker dollar, expectations Iranian crude could be delayed coming to market if a deal gets done on its nuclear program, and a rise in Saudi crude sales prices all contributed to the rise in crude. Propane lagged the run-up in crude, but was still up between 3 percent and 4.5 percent.
Propane prices continued to be pulled higher with rising crude. Fighting in Yemen supported crude. Also supporting crude was a report by the Energy Information Administration (EIA) that lowered growth in U.S. crude production and increased U.S. oil demand.
Crude prices tumbled after the EIA reported a 10.95-million-barrel build in U.S. crude inventory, sending them to a modern-day record. Propane prices lagged a 6.6 percent drop in crude, with a lighter-than-expected draw on inventory a key reason propane prices were able to limit its losses.
Crude and propane prices rebounded slightly from Wednesday’s sharp losses. It was actually a very slow day for propane, with trading light. Crude got support from good economic news from Germany. Rhetoric from Iran that increased concern that a deal on its nuclear work might not get completed by June as expected aided the rebound.
Propane found interested buyers going into the weekend, helping both major U.S. hubs post solid gains. Crude prices also continued to recover, but the day’s high and low trades were both lower than the previous day’s, keeping the price downtrend intact.
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