Calm After The Surge: Oil Markets Pause Amid Renewed Global Tensions

Energy markets are calming down Wednesday after more violence sparked a large rally on Tuesday.

Petroleum futures were being buyers step back in Tuesday morning after Russia’s major attack on Ukraine’s energy infrastructure that broke an alleged cease fire agreement. The rally picked up steam in the afternoon following reports that the U.S. had shot down an Iranian drone as it approached a U.S. aircraft carrier in the Arabian sea, and that naval assets had to intervene to prevent Iranian forces from seizing a tanker as it transited the Strait of Hormuz.

In both cases, negotiations have resumed, with trilateral talks between the U.S., Ukraine and Russia happening this morning in the UAE while the U.S. and Iran were still set to meet to try and hash out a plan despite the escalation on the water. That news seems to be keeping the market relatively calm this morning, but we can expect more volatility as the rumors and headlines continue to swirl.

The steep backwardation in New York diesel prices continues to create challenges with prompt basis values trading north of 22 cents, creating a slippery slope where values today are worth around 30 cents more than at the end of March, which will certainly discourage some shippers from paying up for barrels that will be worth a lot less once they reach the terminal which is creating numerous allocation restrictions and will undoubtedly lead to some temporary outages. Most other markets around the U.S. are seeing hefty discounts to futures to flatten out their curves as supplies elsewhere remain relatively robust.

Despite hours of service waivers granted to 40 states after the winter storms, trucking capacity has become a big challenge in the past week for many along the Eastern Seaboard. In many cases, trucks shifting south to help with relief efforts and to haul thousands of loads of diesel to refill tanks at electric utilities are adding to the challenges. Meanwhile, the court battle over recent federal rule changes to crack down on state approval of commercial driver’s licenses to non-domiciled individuals continues and could have widespread impacts on the availability of drivers later in the year.

The first casualty of the NY and CT programs required to blend 10% biodiesel into heating oil showed up this week a terminal in Albany had to suspend sales of heating fuels due to a lack of biodiesel supply. Given the trucking constraints and the heavier-than-normal demand for heating fuels during this extended cold snap, don’t be surprised if this continues, and don’t be surprised if the states issue a temporary waiver should the issue becomes more widespread.

The API’s weekly estimate gave the first look at the impact of the winter storms with large declines in oil and diesel supplies of 11.1 and 4.8 million barrels respectively , while gasoline stocks saw a large increase of 4.7 million barrels as drivers in many states stayed off the road. Expect to see a sharp drop in crude oil output in the DOE’s weekly report due out at its normal time this morning but based on past events and few reports of damage, those output figures should bounce right back next week.

The IRS issued long-awaited guidance on the Clean Fuel Production Credit (known as the CFP or by its IRS code 45Z) Tuesday, and the news was immediately praised by farming and biofuel industry groups as it extended the program through 2029, placed multiple restrictions on international competition, and provided clarity on what makes a qualified sale. See the table below for the highlighted changes to the rule, and the full version of the proposed guidance is attached. RIN Values rallied to a 2.5 year high Tuesday morning as word of the pending guidance release swirled through the markets but pulled back modestly after it was published.

Here’s an interesting read from Reuters on why U.S. refiners are struggling to handle the sudden increase in imports of Venezuelan oil, and a WSJ note on why India’s alleged (but not confirmed) reduction in Russian oil is easier said than done.