By Scott Wilson
Outlook: Crude and products are trading lower this morning due to easing tensions in the Middle East, weak economic data from China, and the US interest rate environment. Portions of the geopolitical risk premium in the energy market continue to unwind after Iran’s attack on Israel did not amount to much. The biggest questions moving forward are when will Israel retaliate, and if the US will impose further sanctions on Iran. Additional US sanctions on Iran face an uncertain future as it appears to be split on political party lines. Many regional analysts doubt the US administration will take significant action as that could lead to higher oil prices or antagonize China, Iran’s largest purchaser of crude. China’s first quarter GDP of 5.3% easily beat expectations with help from stimulus measures from the Chinese government. However, many indicators released with the GDP data showed that demand in some sectors remains fragile. There is still concern that we will see additional energy demand destruction from the world’s second-largest consumer of crude and petroleum products. Federal Reserve Chairman Jerome Powell said yesterday that it will take longer than expected to reach the Fed’s 2% target rate for inflation, dashing hopes for interest rate cuts in the near term. Markets had priced in at least three rate cuts for a total of 150 basis points at the beginning of the year, while the current landscape is pricing in just 50 basis points of interest rate cuts in 2024. The high-interest rate environment and robust US economy continue to add strength to the US dollar. Although trading lower this morning, the US dollar index is up nearly 4.5% this year, near its highest levels since early November. Due to the inverse correlation between the US dollar and energy prices, a strong dollar can play a part in capping energy prices. Investors will turn to this morning’s DOE report for confirmation to the API data released yesterday, which was bearish for crude, and bullish for products.
Crude
- Expect geopolitical risk premium to fade as days pass without an Israeli retaliation.
- The US is expected to reimpose sanctions against Venezuelan oil tomorrow due to a failure to meet election criteria.
- China may benefit from stricter Iranian oil sanctions if it results in steeper discounts offered from Iran in order to move product.
- Fed Chair Jerome Powell shared a hawkish view yesterday, reinforcing the idea that interest rate cuts will not happen any time soon.
- Reuters estimates crude stocks rose 1.4 million barrels last week. If confirmed on Wednesday, it would be the fourth consecutive week of builds.
- The API survey showed crude stocks rose 4 million barrels last week.
- The EIA will report inventories at 9:30 am CT.
- Eurozone inflation slowed in March which may allow the ECB to begin cutting interest rates starting in June.
- As of 8:06 am CST: Brent crude oil down $0.63 to $89.47, US dollar index down $0.031 to 106.176 while the nearby e-mini S&P 500 futures contract is up 6.25 to 5111.00.
Diesel
- Reuters estimates diesel stocks fell 300,000 barrels last week.
- The API survey showed diesel stocks fell by 427,000 barrels last week.
Gasoline
- Reuters estimates gasoline stocks fell 900,000 barrels last week.
- The API survey showed gasoline stocks fell 2.5 million barrels last week.
- The Biden Administration indicated they may tap the SPR this summer to hold down pump prices.
Propane
- Conway is trading at .7675 while Belvieu is trading at .8025.
- Conway Swap Oct24-Mar25 strip indicative midpoint ~.8250.
- Conway propane is trading at 38% to WTI.
- A correction lower in crude in the coming weeks may provide a buying opportunity for those looking to add length.
Natural Gas
- Overnight weather runs added 8 TDDs to the two-week forecast.
- Freeport LNG was reported to be nearly completely idle as of yesterday which continues to pressure demand lower along with prices.
- US feedgas into US LNG plants was down 12% today due to lower gas flows into Sabine Pass and Cameron LNG.
- Reuters estimates nat gas stocks rose between 48 and 56 Bcf last week.
Prompt WTI Vol: Yesterday’s reference to purchases of $250 WTI calls was accompanied by $25 puts. The buyer of this strategy is taking a position to go long Volatility and was likely enticed by favorable values relative to the last 5-years.
