Major Escalation In Middle Eastern Tensions Seems To Be Outweighing The Bearish Inventory Data

Energy futures are off to another strong start Thursday, as a major escalation in Middle Eastern tensions seems to be outweighing the bearish inventory data that sent prices tumbling on Wednesday.

Today is the 8th trading session of the new year, and the Red Green pattern for ULSD continues to hold with each day so far bringing an alternating result. We thought the pattern was breaking Wednesday when ULSD started out with big early gains after a strong Tuesday showing, but the nickel rally turned into nickel losses following a bearish DOE report that showed swelling US inventories despite lower refinery runs.

Despite the 10-cent reversal lower Wednesday, ULSD managed a higher high and higher low on its daily bar chart, keeping the technical door open for it to continue higher (just like we’re seeing this morning) and ultimately completing the short-term W pattern by hitting at least $2.80, with a strong argument that we could make a run at the $3 mark in the next few weeks.

Iranian forces seized an oil tanker off the coast of Oman overnight, which brings the Strait of Hormuz into the spreading violence in the region and will most likely force a larger US naval presence to keep products flowing.

Here’s the catch: This tanker wasn’t a random ship moving through the world’s busiest oil transport lane, it’s a ship that was at the center of a US/Iran dispute over sanctioned oil last year. It’s unclear whether or not the ship was specifically targeted for that reason, or if it was just an unhappy coincidence for the operators. What is clear is that the ship has been moved into Iranian waters this morning, which is sure to raise tensions in the region.

This latest attack happened just about a hundred miles to the south and east of the Strait of Hormuz, which is the oil market’s busiest chokepoint. Given the long term issues with the Panama Canal’s lack of water (which doesn’t have a short term solution), the Suez Canal being avoided by many due to the Houthi Attacks in the Red Sea, and now this latest attack, 3 of the world’s 4 busiest shipping lanes are now embroiled in some fashion, and the 4th seems like it could be vulnerable if China decides the distractions elsewhere in the world make this an ideal time to take it’s shot at conquering its neighbors.

The bearish DOE figures overshadowed the shutdown of Delta/Monroe’s PA refinery due to storm-related power outages that caused immediate product allocations across the region and many suppliers to make double digit price increases during the morning hours.  Meanwhile, the P66 Bayway refinery is still recovering after an upset last week, which would probably be more problematic for consumers in the region if the weather wasn’t also significantly hampering demand. 

The DOE has made no secret that it’s been struggling with its weekly petroleum accounting, making changes to its processes last year to try and improve the accuracy of its reports.  Those efforts have been largely focused on oil figures, but this past week suggests there may be some challenges in the refined product space as well. The DOE claims that refiners reduced run rates, and that refined product demand recovered sharply after the Holiday Hangover, and yet both gasoline and diesel saw a 2nd straight week of huge inventory builds.   Import/Export flows can’t explain the difference, so we may have to chalk this up to either another accounting glitch, or perhaps the reality that the data provided the prior 2 Friday’s (when refiners and terminal operators have to submit their data) were both go-home-early days and the numbers reported may not have been the most accurate.

Despite the collapse in gasoline margins over the past few months, and the slowdown last week, US refiners are producing more to start the year since we’ve seen since the start of COVID. That output is pushing total US inventories to multi-year highs, but the distribution of those stocks varies greatly across the country. Most notably, the middle of the country is facing a glut of supply, while coastal markets are still holding below average thanks to their exporting capabilities. East Coast diesel continues to look the most vulnerable to a supply disruption with inventories continuing to sit on the bottom end of their seasonal range despite the recent builds, while West Coast inventories continue to be understated due to the lack of reporting on Renewable Diesel in the weekly stats. 

A deal made in Dallas. Sunoco is selling 200 convenience stores to 7-11 for $1 billion. The proceeds of that sale are apparently being used by Sunoco to increase their European terminal footprint in an effort to diversify their supply options on the East Coast.

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