Diesel Leads Energy Markets Lower Despite Mounting Geopolitical Risks

Diesel futures are leading a wave of selling in energy markets to start Tuesday’s session, as signs of supply improvement and some good old fashioned political smoke and mirrors seem to be keeping buyers at bay in the early going.

An Al Jazeera note this morning, citing KPLER analysis, suggests that part of the reason oil exports from the Persian Gulf have recovered to “Pre War” levels (if you exclude all of Iran’s exports anyway) is that Gulf countries are paying Iran a secret toll to let their ships pass unscathed. The flip side of that coin is the analysis suggests this is a short term race to get barrels out of the strait before the U.S. gets its 3rd carrier on station and the war heats up again.

Meanwhile, the UKMTO reported 2 more tanker attacks near Hormuz on Monday, while a 3rd tanker was turned around after threats from the IRGC.

Saudi Arabia and Yemeni government forces took back several towns near the Bab El Mandeb strait from the Houthis overnight as a new operation titled “Yemeni Dawn” started to ramp up. The Houthis deny losing any territory, and claimed attacks on multiple Saudi airports and the 400mb/day Rabigh refinery, which the Saudis are disputing.

The White House showed once again how challenging it is to lower prices in the midst of a global supply crisis Monday, announcing plans to defer federal taxes on dyed diesel used on the highways Monday while pretending that will reduce costs at the pump. The executive order claims the deferral will save $60/fill on a 250 gallon tank, while the “Fact Sheet” included with the announcement claims $100/fill savings. Neither of those announcements mention that since the tax is only deferred, not waived, it doesn’t actually save anything in the long run and will not help produce a single gallon of incremental supply. Many retailers & end users probably won’t bother contaminating their tanks with dyed product knowing the federal tax bill is due in less than 3 months anyway.

Since the White House has implicitly acknowledged it can’t actually waive the federal taxes without congressional approval, they could have instead allowed sales of Non-Transportation “Heating Oil” labeled product which avoids the 31 cent/gallon cost of the Renewable Fuel standard and is exempt from the now-deferred on-road diesel tax that the government needs to repair highways. The AFPM had lobbied for the use of Heating Oil (Which is the same dyed ULSD product but is labeled for non-transportation use, thus avoiding RFS obligations) but it appears the White House ignored that request, and RIN values rallied on the day now that it appears another RFS loophole won’t be granted.

Chevron reported another bout of unplanned flaring at its 285mb/day El Segundo refinery late Monday morning, its 2nd report of the day and the 4th reported upset of the past week. CARBOB gasoline differentials jumped more than 7 cents on Monday following the reports of upsets at this facility and the work being done at Marathon Wilmington.

The NHC gives 90% odds of a storm being named in the Gulf of Mexico over the next week, with the New Orleans region under potential threat this weekend. The storm is expected to spend a couple of days churning around the Bay of Campeche near the Mexican border this week before turning North, and both the European and U.S. models suggest Louisiana is the most likely landing spot. The early forecasts suggest this won’t be a major hurricane, but the extra-warm waters in the gulf could change that outlook. Expect to see off-shore production facilities start to close preemptively later this week, and we’ll just have to wait another day or two to know whether or not the cluster of refineries around New Orleans will face a real threat.