Energy Markets Edge Up As Middle East Tensions And Inventories Tighten

Energy markets are moving higher for a 3rd straight day after reports that Iran had fired on 3 more ships near the Strait of Hormuz Wednesday, making the confusing efforts at negotiations even more questionable than they’ve been. The price action is still relatively calm compared to what we’ve seen the past 7 weeks, which is no doubt in part due to the extension of the ceasefire announced by the U.S. President Tuesday, even as the U.S. military is using less violent means to disrupt Iran’s shipping capabilities both in the gulf and now the Indian Ocean.

The API reported weekly inventory draws across the board in its latest estimate, with crude stocks dropping 4.4 million barrels, gasoline stocks dropping by 5.1 million barrels and diesel stocks falling 4.6 million barrels for the week. The DOE’s weekly report is due out at its normal time this AM. The import/export flow remains a key figure to watch as the world scrambles for replacement supplies which is pushing USGC exports to record levels, while the West Coast still needs to be a buyer of refined products. Refinery runs in PADD 5 will also be a worthwhile number to watch as several unplanned upsets in the past couple of weeks, a few plants having to hunt for replacement crude after the 6 week transit cycle has run its course, ongoing work to bring PBF’s Martinez plant fully back online since a fire 15 months ago, and Valero Benecia shutting down all combine to create an environment you might call complex.

Speaking of which, we went 3 full weeks without a single bid or offer published for San Francisco spot diesel on the April pipeline cycles, and pricing agencies stood firm in refusing to acknowledge the rapid changes in neighboring markets and replacement products like RD by continuing to publish the same basis differentials all month. The May pipeline cycles take over the prompt position today, and there have already been numerous bids and offers for that volume, with basis differentials some 10 cents lower, combining with the 10 cents of backwardation in futures so push those spot prices some 20 cents lower before today’s futures rally which is closer to what we’ve seen in downstream markets for the past couple of weeks.

RIN Values hit another 3-year high Wednesday as the reality that it may be a big struggle to meet the RFS quota this year is starting to sink in. There are also reports of a renewed effort to pass a nationwide E-15 law, and cap small refiner exemptions to companies with 75,000 barrels/day of TOTAL capacity, whereas today that figure applies to each of their facilities. IF that bill is passed this time (similar versions have failed multiple times in the past couple years) companies like HF Sinclair and Delek would be the most notable losers as they operate numerous small refineries, but are well over that threshold in total, but the total impact on RIN markets should be fairly limited given that this wouldn’t take effect for a couple of years, and the EPA is now redistributing 70% of any waived volumes anyway.

Don’t forget about the “other” war going on. Reports this week suggest that Ukraine’s shifting attacks targeting Russia’s oil export facilities have forced sales to drop by over 400mb/day to the lowest since the COVID lockdowns. Russia for its part won’t let that crisis go to waste and is now threatening to cut of Germany’s oil imports in retaliation for its efforts to aid Ukraine.