Trader's Corner
Free Trial Subscription

View here!

View here!

View here!

View here!

View here!

THIS WEEK'S TOPIC
CRUDE PRICES

When will crude prices swing upward?
By MARK RACHAL
Cost Management Solutions    
Cost Management Solutions

Visit propanecost.com

It is highly probable that the crude pricing pendulum has finally reached the point of equilibrium and is ready to swing into an upward trajectory.

Featured photo

The chart above shows West Texas Intermediate (WTI) crude closing prices from Oct. 1, 2014 going forward. We choose to look at this time frame because it shows the impact of the Organization of Petroleum Exporting Countries’ (OPEC) decision to change its role in the global crude production hierarchy.

That decision came in November 2014. Leading up to that November, crude prices were in a continued downtrend that began after WTI crude had reached $104.59 on July 21, 2014. By Oct. 31, 2014, WTI crude was trading at $80.54, a drop of $24.05, or 23 percent. Crude traders were expecting OPEC to announce a cut in production to support prices.

However, global oversupply that was primarily fueled by increased U.S. production caused a fall in crude prices. OPEC saw no benefit in cutting its own production, only to see market share lost to high-cost producers in the United States. Instead, at its November meeting, OPEC announced it would not cut production to support prices but would increase production to defend its market share. After this, prices plummeted.

At that time, the break-even point for production from U.S. shale formations was $60 per barrel. OPEC expected to see prices fall below that mark and then recover as U.S. production fell. This is where its expectations were skewed. It expected U.S. crude production to fall sharply below that mark, and it did not.

Instead, U.S. crude producers cut expenses, completed wells already drilled, optimized production and pre-sold production at prices that would allow them to make a profit. As a result, the break-even point for U.S. shale production dropped to below $40 in many cases. This week, Continental Resources, one of the big crude producers from shale formations, said it would need $37 per barrel to be profitable.

Through all of these changes in crude production hierarchy, prices were volatile, seeing some periods of recovery, but the downtrend remained intact. The pendulum may have finally swung to where the downside risk for crude is at least even with the upside risk.

Looking at the chart above, the pendulum has gone from point “C” to point “A.” When crude closed at $26.55 on Jan. 20, it had gone well below where it needed to go to do the maximum damage to U.S. crude production. All of the short-term measures crude producers took in 2015 are no longer available to them. Many did not hedge their production for this year. The inventory of drilled-but-uncompleted wells has been exhausted. There are no more cuts to be made in expenses.
(continued below)

Visit propanecost.com
Find CMS on Facebook Questions? Email CMS Try a 10-day Free Trial of PPI

For most U.S. producers, the only thing left to do is to cut capital spending, pay off debt (perhaps by selling assets) and hope crude prices recover before they have to file for bankruptcy. They will see an inevitable decline in production during this painful holding pattern. We expect U.S. crude production to fall rapidly during this year. The U.S. Energy Information Administration is expecting production to fall 700,000 barrels per day (bpd) from where it was last year. We would not be surprised if it is worse.

Currently, global crude overproduction is around 2 million bpd. Demand for crude is supposed to be up 1.2 million bpd this year. If this is true, then just the decline in U.S. production will be enough to rebalance supply and demand. Of course, there is the expectation for more production from OPEC, especially from Iran now that sanctions against it have been lifted. There are also going to be production increases from Iraq and perhaps other OPEC countries. However, the United States won’t be the only country to experience a decline. Russia is expecting production to decrease, and other producers will see declines as reduced capital spending prevents the replacement of depleting wells.

There is the potential for another downturn in crude, but we think there is a good chance the low has been reached and momentum of the price pendulum will slowly swing toward more upside risk.

This week, there has been a lot of support for crude on talk of cooperation among global producers to cut production. We doubt that will happen but believe the talk should limit the downside for crude. In fact, we do not believe a production agreement is necessary for crude supply and demand to balance and for crude prices to swing higher.

For that reason, we believe U.S. propane retailers need to shift to a supply management strategy that would see them use pre-buys and financial tools to hedge more of their future supply needs – a strategy that guards against upside price risk.

We went into 2015 with markets falling, recommending that our clients be no more than 30 percent long for the winter of 2015-16. The market never gave us indication that we should be any longer than that 30 percent, as the spot market remained the place to be.

However, for the upcoming winters, the recommendation will tend to be on the higher end of the spectrum with as much as 80 percent of future supply that needs hedging. With crude prices swinging upward, U.S. propane supply growth swinging downward and U.S. export capacity increasing, we believe future price risk is on the upside.

In our upcoming hedging workshop, we will show propane retailers how to prepare for upside price risk. Please consider attending the April workshop.


CONNECT

Twitter
Facebook
View here!

View here!

View here!

View here!

View here!
WHAT IS COST MANAGEMENT SOLUTIONS?
Market Information Services

The Propane Price Insider is an email service that provides:
  • Three daily price Flash Wires
  • Periodic option quotes
  • Wednesday inventory data updates around 11 a.m. ET
  • 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 email, sign up online here or call 888-441-3338.
Unbiased Analysis

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.

Client Services

Many retailers simply don't have time to analyze the large amounts of data to make an informed purchasing decision.

We offer:

  • Detailed market recommendations on hedge and pre-buy entry points
  • Prompt market execution of hedging strategies
  • Supply cost analysis and recommendation as to effective hedging strategies
  • Large volume consideration when we place your hedges
Contact us GOT STORY IDEAS? Email Brian Richesson, Editor in Chief
LOOKING FOR ADVERTISING OPPORTUNITIES? Email Brian Kanaba, Publisher

You are currently subscribed to Trader's Corner as %%EMAILADDR%%.

Forward to a friend  | Change your subscription preferences  |   New subscriber sign-up
If you wish to leave this mailing list, simply unsubscribe. | Refer to our Privacy Policy.

LP Gas Magazine is a division of North Coast Media LLC.
1360 East 9th St., Suite 1070, Cleveland, Ohio 44114
© 2016 North Coast Media. All Rights Reserved.
Reproduction in whole or in part is prohibited without written permission.