Energy Markets Begin The Week Mixed As US–Iran Tensions Escalate

Energy futures are off to a mixed start this morning with the gasoline contract trading slightly higher while the oils (heating, American crude, and Brent) all drifting lower to start the week.

Last Friday, prompt month refined product futures contracts surged before the settlement with diesel and gasoline ending the formal session above the $4 and $3 mark for the first time since October of 2022, respectively.

Money managers continued piling into WTI and Brent last week while showing signs of cold feet in the refined product markets. While the liquidation of short bets continued in earnest for both Brent and WTI, the ‘smart’ money exited gasoline and diesel positions en masse, dropping the open interest in refined product positions by over 10% last week.

While it’s unlikely we will see anything other than tightening supplies and climbing prices while the Strait remains closed, there are a handful of headlines that may cause some oscillation within the overall upward price trend.

Bullish factors:

As of now, the U.S. military strikes on Kharg Island only targeted military assets while sparing the vital oil infrastructure at Iran’s primary export hub, where essentially all of the nation’s oil departs from. The White House has warned of future attacks if shipping in the Strait of Hormuz continues to be hindered.

U.S. is sending the amphibious assault vessel USS Tripoli to the middle east along with a retinue of warships, F-35 fighter jets, and thousands of marines, ratcheting up the probability of a boots-on-the-ground scenario in Iran.

Bearish factors:

The U.S. is lifting its sanctions on all Russian oil that has already been loaded onto tankers as of last Thursday, granting Moscow’s customers a 30-day reprieve. This comes after U.S. granted a similar waiver to India during the first week of the war.

The IEA has signaled its commitment to relieving the stress on energy markets caused by the closure of the Strait of Hormuz with a historic release of strategic energy reserves. While it isn’t enough to compensate for the total amount of bottlenecked oil, it is of mild comfort that levers are being pulled to alleviate the global supply disruption.

Cuba acknowledged it is in negotiations with the U.S., temporarily cooling hawkish sentiment that we could see a repeat of Caracas in Havanna and regional instability closer to home than the Middle East.