Biggest Rally of the Year Stalled Amid Middle East Tensions

Energy futures had their biggest 1-day rally of the year Wednesday as new supply fears added to renewed demand optimism and a technical breakout to create a snowball effect of buying heading into the settlement, only to see prices reverse course overnight.

RBOB and ULSD futures have both dropped more than a nickel after rallying close to their May highs overnight, setting up a new layer of short-term resistance on the charts around $2.19 for gasoline and $2.22 for diesel that may help determine if the June rally has staying power or if we’re set for more sideways trading.

The latest signs of escalating violence in the Middle East seemed to be a contributing factor to the short-lived buying spree as the U.S. is taking steps to prepare its embassies and military bases for possible attacks as reports of a new Israeli strike coming for Iran swirl. Israel also made its first naval strike on a Houthi port in Yemen, moving some ships further towards the conflict than they’ve been before. Iran meanwhile is saber rattling again after multiple reports of it breaking agreements on its nuclear programs, threatening to further escalate enrichment and strike U.S. bases, even as negotiators still try to work a deal with the U.S. with a 6th round of negotiations planned for the weekend. If you want to know how ample the supplies of energy stocks are globally, consider that despite all of this conflict in the region that handles most of the world’s petroleum shipments, we’re still dealing with oil prices in the $60 range, not $160 range.

After the latest U.S.-China trade agreement sent waves of optimism through global markets, we’re seeing both equities and the US dollar pull back this morning following a statement from the President saying he’ll present more unilateral tariffs in the next two weeks.

The biggest winners in the U.S.-China trade deal may be major midstream companies Enterprise Product Partners and Energy Transfer as their huge ethane export businesses may be given a new lease on life. Read this RBN note for more info on the rapid growth in ethane production and exports in recent years, and why options to replace Chinese demand are slim.

Marathon reported a 2nd emissions event of the past 2 days at its 631mb/day Galveston Bay refinery Wednesday. This issue was related to product inadvertently getting onto a tank roof and draining into the dike system, and doesn’t appear to have any impact on production operations.

Notes from the DOE’s weekly report: See charts attached.

U.S. refinery runs hit a 5.5 year high last week, reaching their largest output since COVID contributed to the largest decrease in refining capacity on record. Refinery runs decreased in PADD 1 by remain comfortably above average levels. That drop was more than offset by increases in PADDs 2, 3, & 5, all of which are still at above average run rates. Following several issues over the spring, PADD 5 is coming back to life with a couple weeks of healthy increases which has put significant downward pressure on the lofty basis values and rack spreads in the region. PADD 3 continues higher along with the total US run rate, both setting 5-year highs last week. Utilization rates are now at or above 90% for all PADDs except 1.

Gas and diesel inventories both built last week despite increased demand following the post-holiday slump. Diesel stocks are well below average everywhere except PADD 4, and the total U.S. level is holding below its 5-year range for the 5th consecutive week. Gas stocks built a bit more but are still about 4mm barrels below the 5-year average and showing a much larger increase in demand. Gas production also ramped back up and looks to be in line with the change in demand. Ethanol stocks dropped about 700k barrels on the week but are following a downward seasonal trend ahead of last year’s pace, which set the higher end of the 5-year range the majority of the year. Meanwhile, exports of the product flattened out while production hit a record high at 7.84mm barrels.