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THIS WEEK'S TOPIC:
CRUDE PRICES
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How OPEC production and the failed Iran nuclear negotiations affect propane retailers |
The primary driver of crude prices last week was the negotiations between six world powers and Iran concerning Iran’s nuclear program. The negotiations were of interest to crude markets because sanctions have resulted in about a million barrels per day (bpd) of Iranian crude unavailable for export. The United States, Britain, France, Germany, Russia and China would lift the sanctions if Iran would agree to give up its nuclear ambitions.
Iran has about 30 million barrels of crude stored in tankers. Should the negotiations succeed, Iran would likely be free to export more of its crude. There was speculation that Iran would be able to increase its crude exports by 500,000 bpd within six months and be at 700,000 bpd by the end of the year. Iran’s economy is hurting due to the sanctions, and it would have every reason to push new production and stored crude onto global markets as soon as possible.
With the world already flush with crude, the possibility of the sanctions being lifted from Iran was bearish for crude markets up until the March 31 deadline to complete the negotiations came and went without an agreement. Even though negations continued an extra day, crude prices rallied on news of the failed negotiations.
Some nations tried, as much work has been accomplished with the negotiations and an agreement could be coming soon; crude markets were still able to put the immediate threat of more Iranian crude on global markets behind it and recover some of the losses leading up to the negotiation deadline. Crude traders bet fairly heavily that a deal would be done in the final days leading up to the negotiation deadline Tuesday night. West Texas Intermediate (WTI) fell from $51.43 to $47.60 in just three days. Prices recovered to $50 by the close on Wednesday.
The failure of the negotiations, however, may not be a reason for crude to go on much of a sustained rally. Even without more Iranian crude, it is estimated that global crude supplies exceed demand by 1.5 million bpd, and the second quarter is historically a weak pricing quarter for crude. If you are a crude bear, the failed negotiations are like settling for a regular Oreo cookie instead of a Double Stuf Oreo cookie. You may not be getting 140 calories per cookie, but you are still getting a tasty 40 calories. There remains a lot of excess calories in this crude market.
Members of the Organization of the Petroleum Exporting Countries (OPEC) are more likely to increase crude production than cut it, even in light of a weak pricing environment. They said they will fight for market share, and recent estimates on their production bear that out.
It is estimated that OPEC production increased by 560,000 bpd during March over where it was in February. The 12 members of the organization are now producing 30.63 million bpd of crude, 630,000 bpd over their own quota. Those production numbers are being achieved with Libyan crude production about a million bpd below capacity and the above-mentioned sanctions still in place on Iran.
OPEC is keeping the pedal to the metal in its strategy to force high-cost producers in the United States out of the market. With the second quarter generally weak for crude prices and crude storage in Cushing, Okla., possibly getting full, one may not want to be overly bullish on crude, despite seeing the bears lose out on that bag of Double Stuf Oreo cookies.
With propane inventory high and builds above normal, the second quarter will remain a time for propane retailers to be cautious about supply, in our view. This is a great pricing environment for propane, so most buys are likely to work out fine for propane retailers and their customers. Nonetheless, it might be best not to put your hand in the cookie jar until the coast is a little clearer concerning crude prices and propane inventory.
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WEEK IN REVIEW
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The Iran nuclear talks dominated the week, creating volatility in crude markets. Propane traders were faced with moderating weather and high inventory. The Energy Information Administration (EIA) reported a 2-million-barrel build in U.S. propane inventory. We are bearish on crude and propane.
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LAST WEEK'S HIGHLIGHTS
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Propane continued to give up gains from the previous week, as milder weather and high inventory take their toll. Crude fell for a second day in a row, as traders were cautious ahead of the conclusion of nuclear talks between Iran and world powers.
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Propane prices continued to slide ahead of the inventory data from the EIA due out Wednesday. Falling crude was the key headwind for propane, however. Caution due to Iran nuclear talks kept crude traders at bay.
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Crude prices surged, pulling propane prices along for the ride. A deal on Iran’s nuclear program was not completed before Tuesday’s midnight deadline. In recent days, crude had been down on expectations a deal would be announced.
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Talks on Iran’s nuclear program continued, and that had traders cautious again. Crude went lower and propane outpaced crude to the downside. Late in the day, there was word an announcement would be made that a general framework for an agreement had been reached.
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Markets were closed for the Easter holiday.
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WHAT IS COST MANAGEMENT SOLUTIONS?
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The Propane Price Insider is an e-mail service that provides:
- Three daily price Flash Wires
- Periodic option quotes
- Wednesday inventory data updates around 11 a.m. ET
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Evening report with executive summary, weather maps and complete review of energy prices that are based on propane's Btu equivalent
For a free 10-day trial subscription by e-mail, sign up online here or call 888-441-3338.
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Cost Management Solutions LLC (CMS) is a firm dedicated to the analysis of the energy markets for the propane marketplace. Since we are not a supplier of propane, you can be assured our focus is to provide an unbiased analysis.
Contact us today to see if you can benefit from having the Energy Price Watchdog working for you.
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Many retailers simply don't have time to analyze the large amounts of data to make an informed purchasing decision.
We offer:
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Detailed market recommendations on hedge and pre-buy entry points
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Prompt market execution of hedging strategies
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Supply cost analysis and recommendation as to effective hedging strategies
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Large volume consideration when we place your hedges
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