Energy Markets Face Growing Uncertainty As Conflicts Threaten Oil Flows

Energy futures are seeing strong gains Wednesday as the war with Iran flares up once again after 3 ships were attacked near the Strait of Hormuz Tuesday, prompting U.S. retaliation with both the pen and the sword.

The price reaction to the latest violent escalation near the strait is a bit more than we saw the past couple of times that the two sides lobbed missiles at each other, which was in part due to the U.S. Treasury reinstating sanctions on Iran’s oil industry after they’d been waived as part of the peace agreement. There are also statements from the U.S. President that the ceasefire is now over, which should give the U.S. fuel industry more reason to continue ignoring his threats and stunts over gasoline prices.

A KPLER report that transits through the strait continued Tuesday despite the attacks on at least 3 ships seems to be helping keep a lid on the buying for now, while a Reuters report this morning suggests at least 4 ships have turned back from crossing the strait – some after being warned by Iran of more attacks if they continued.

The API reported healthy inventory draws last week as the pre-holiday fill up rush pulled gasoline inventories down by an estimated 2.9 million barrels, and distillates dropped by 1.8 million barrels. Commercial crude oil stocks were said to decrease by 399,000 barrels on the week, while the SPR released another 6.2 million barrels, drawing the reserves down to a fresh 43 year low. The EIA’s weekly report is due out at its normal time this morning. Expect an uptick in export activity as the Gulf Coast plays catch up from the bad weather that limited movements earlier in June, and that will remain a key number to watch throughout July to know whether or not the resumption of traffic in the straight is actually reducing bidders for U.S. supply.

Marathon reported unplanned flaring Tuesday morning at the Wilmington section of its 365mb/day LA-area refining complex. The reason for the event is under investigation, but is apparently still ongoing this morning according to the AQMD event notification. This is the first refinery hiccup reported to the AQMD since May 22nd, which marks an unusually long stretch of worry free operations following a very busy spring for unplanned repairs. CARB diesel basis saw a modest tick higher with differentials up 2 cents following this news, while CARBOB gasoline differentials were unimpressed by the downtime as the increase in imports continues to be more than enough to meet local demand, which is pushing spot to rack spreads in the region to multi-year lows. Hart Energy this week is highlighting the boom in product shipments between U.S. coasts thanks to the Jones Act waiver that is helping push more gasoline from the Gulf Coast to the West Coast, and decreasing the demand for imports from Asia for now. Despite calls to end the waiver, which is currently set to expire August 16, it seems less likely that will happen now that the war is apparently back on.

Ukraine continues to flex its capabilities this week, hitting multiple refineries, oil terminals and a dozen Russian shadow fleet tankers less than a day after hitting Russia’s largest refinery which sits more than 1500 miles from the border for the first time. Reports suggest that the 420mb/day OMSK refinery in Siberia was forced to cease all operations following damage at at least 4 different units at the refinery, and gasoline sales to the public in that area have already been halted as a result. There’s no shortage of debate as to whether Ukraine’s successful destruction of Russian energy infrastructure will force a peace agreement, or escalation of the war, but don’t be shocked if a lifting of sanctions on Russia’s energy sector is used as a lever to try and get a peace deal done.