Energy Markets Cool, But Strait Of Hormuz Closure Keeps Risk Elevated

Energy markets are lower to start Tuesday’s session following one of the wildest days for the market on record Monday. After a day like yesterday, a $5 drop in WTI and 10 cent losses for products like we’re seeing this morning feel pretty pedestrian. While comments and signs that the worst of the Iran war may be over, the Strait of Hormuz is still not open for business, leaving markets susceptible to more huge price swings as most tankers simply won’t take the risk of being hit by a drone and becoming the next Exxon Valdez.

ULSD (HO) Futures had a bigger swing on Monday than they have for an entire year in 20 of the past 27 years of trading. The 68 cent range from RBOB was bigger than 8 years out of 20 total for that contract, and WTI surpassed 19 of the past 27 years with its daily swing of more than $38/barrel. While the RBOB swing may have been the least impressive of the 3, that was the biggest daily price range in the contract’s 20 year history, while the ULSD swing came in 3rd behind 2 days in the spring of 2022 during the early days of the Ukraine war. Interestingly enough, 2 of the 3 biggest swings on record both happened on March 9 for ULSD and for WTI, the only day we’ve seen a bigger swing than yesterday was that fateful April 20th during the COVID lockdown when prices settled at negative $40/barrel.

Prices topped out late Sunday night (early Monday in the volatile Asian markets) and had already cut their gains by 2/3 by this time yesterday, then we saw further pullback after the G-7 said they were ready to coordinate an SPR release similar to what they did in 2022 if it was necessary, but they didn’t think it was necessary at this time. In addition, France announced it was sending a fleet of warships to the Middle East to try and help restore order. Those headlines seemed to be enough to keep the slide going into the settlement, and then the selling really picked up after reports that the U.S. President said the war was “very complete”, sort of.

The huge reversals from 4 year highs helped spur an impressive recovery rally in equity prices after huge losses were seen in Sunday’s overnight session around the globe while crude prices were trading up nearly 30%. While the correlation between equity and energy prices had been largely non-existent for most of the past couple of years, as long as the Strait of Hormuz is out of business, expect there to be a very strong tie between equity and energy prices, only in this case it’s a negative correlation as lower oil prices will ease fears of runaway inflation spurring a global recession.

Saudi Arabia announced it was able to restart its 550mb/day Ras Lanuf refining complex that was shut as a precaution following a drone attack in the first two days of the war.

Valero reported an upset at its 250mb/day Texas City refinery Monday caused by heavy rains over the weekend. A sulfur recovery unit was tripped offline by the event, but it does not appear that other units were impacted.