War, What Is It Good For? Absolutely Nothing
June 17, 2022
Written By Tim Danze
On Feb. 18, 2022, six days before the Russian invasion of Ukraine began, West Texas Intermediate (WTI) crude oil was trading at $91.07 per barrel. Since then, many countries have condemned the Russian aggression and responded to it with sanctions and banning imports of Russian energy products. As of May 26, more than three months since the conflict began, WTI crude is now trading for $113.69 per barrel, a price increase of 24.8 percent.
A look at energy product inventories helps to show why domestic fuel prices have risen dramatically in such a short timeframe. On Feb. 18, gasoline stocks were at 246.5 million barrels and distillate inventories were at 119.7 million barrels (which was already 33 million fewer barrels than the prior year). As of May 20, gasoline stocks were at 219.7 million barrels and distillates were at 106.9 million barrels. Gasoline inventories are about 8 percent below their five-year average, and diesel stocks have declined roughly 24 percent below the five-year average.
Pricing has bounced around a little since the war began, but we are now entering the summer driving season with the average gallon of gas in the United States hitting a high of $4.60 on May 26, about 51 percent higher than a year ago. The average cost of a gallon of diesel fuel is $5.54, which is also at record levels and approximately 74 percent more than at the same time last year.
At the time of this article’s publication, we have yet to see any real progress made on any front that would help us to determine where these energy markets might head. Despite the sanctions and bans on Russian energy products, those products have still found their way to buyers. Energy sales have been crucial in financing Russia’s war effort. At the same time, the Russian crude has kept supplies around the globe from tightening any further than where they could be or should be.
It does appear as though sanctions may be beginning to have some impact. In its May sales for June delivery, Russia offered some of its crude and refined products and demanded to be paid in rubles. This time, there were no buyers. Several potential buyers complained that the options to pay were too limited and it just couldn’t be done. Traders will likely figure out a way to work around these issues, and I would guess these barrels eventually get sold.
The oil barrels released from strategic petroleum reserves around the world gave us a brief decline in prices, but it was short-lived. I guess you could conclude that the release of the barrels from reserves has helped keep crude inventories flat, but gas and diesel stocks have fallen behind. These two products are in a concerning situation.
Diesel supply concerns were an issue before the war, and the situation has only worsened. The market has been exceptionally volatile with large intraday moves. The week of April 25, ultra-low sulfur diesel futures increased more than 90 cents per gallon. That is extreme and distillate inventories are tight, but this situation clearly has more behind it than meets the eye. Prices are likely to continue to move higher until we see demand destruction. At what price level that happens remains unclear, but we’ve yet to see it occur.
I find it hard to contract fuel at the current price levels despite the fact that I believe prices in the near term are headed higher. If you are concerned, I would recommend locking in a very conservative volume of fuel or spending the 25 cents to obtain the protection of a maximum price contract. The longer-term picture is much harder to forecast, but I believe the market is moving higher to curb demand, which it will accomplish eventually. Markets do not like all this uncertainty, so I expect volatility to remain high.