Energy Markets Pause After Historic Rally As Supply Risks Persist

Energy markets are seeing a round of selling Friday morning as we wrap up an otherwise strong week of trading. The U.S. and Iran haven’t shot directly at each other in a full 24 hours and both OPEC and the IEA are acknowledging the demand destruction done by the war, both of which may be contributing to the pullback this morning, while position squaring after multiple days of strong gains is also likely in play.

ULSD futures have wiped out 9 cent overnight losses for a 2nd day in a row, turning positive around 7am central, after settling at a fresh 4.5 year high of $5.0575 Thursday, with a new intraday high for the year set at $5.1664. ULSD futures have only ever traded this high for 2 days in history, April 28 and 29 of 2022 in the early days of Russia’s full invasion of Ukraine, with the 29th remaining the most volatile day on record sporting a record high of $5.8595, and a low that same day of $4.4067 before settling at $4.7817. It doesn’t seem like we’re quite ready for the blow-off top in prices just yet, but don’t be surprised at all to see similar swings in the coming months.

While the Hormuz attacks have paused for a day, the wars elsewhere continue to escalate with widespread impacts on energy supplies, not to mention humanity. The Houthis have taken control of essentially all of Yemen’s Red Sea coastline with advances this week, and also took over an island in the Bab El Mandeb strait that will give the rebel group more direct access to attacks Saudi Arabia’s back door oil exports. In addition, reports this morning suggest the Saudi East/West oil pipeline that’s been maxed out to avoid Hormuz, is on fire after Houthi attacks.

The U.S. has reportedly declined Saudi requests to assist with direct air strikes against the Houthis, on the 25th anniversary of 9/11, but are aiding the Kingdom with intelligence and targeting support, along with roughly 200 advisors on the ground.

Ukraine’s drones attacked 2 more Russian oil refineries overnight. The 141mb/day Saratov plant that was taken offline after being hit Tuesday was struck again overnight, and there are reported that the 290mb/day Lukoil Volgograd facility was targeted, with large fires reported in the area, although it’s not yet clear whether or not the refinery itself was hit. See the table below for more detail on recent attacks.

Both OPEC and the IEA lowered their global oil demand forecasts in their September monthly reports, but the competing agencies also both believe demand will rebound next year…as long as Hormuz reopens. The rivals have about a 5 million barrel/day gap in their OPEC & Friends’ production estimates, with the OPEC report still including the UAE’s output while the IEA does not, and OPEC sets Saudi Arabia’s output at 7.2 million barrels/day, while the IEA estimates it just below 6 million barrels/day, down from 10 million before the war.

OPEC’s monthly report showed a modest rebound in the cartel’s output for the month with increased output from Iraq offsetting declines from Iran and Saudi Arabia. Kazakhstan’s output ticked up by 159mb/day as shipping through the CPC hub resumed following drone attacks against the Russian facility on the black sea over the summer. Those increases offset a drop of 160mb/day of output from Russia for the month.

The IEA estimates that global refinery runs are down 4.2 million barrels/day (roughly 5%) from year ago levels due to the wars, while oil production around the gulf is still down about 10 million barrels/day (roughly 10% of global capacity). The IEA’s report also focused in on the loss of diesel exports from Russia and the Gulf Region, which it estimates are 1.6 million barrels/day lower in August than in February, representing 45% of global seaborne trade.

Human analysis of the DOE’s weekly report below. Charts and AI analysis are attached.

Crude stocks show a slight draw with another drop in the adjustment factor, despite most signs pointing towards a build and production levels hitting a new all-time high of 13,947 Mb/day. The SPR drew again, down to November 1982 levels leaving total U.S. crude inventories about 151 million barrels below the 5-year average.

Refinery runs picked up in PADD 3 despite a rash of tropical storm-related issues in Texas and Louisiana and hit a new all-time high at 9,730 Mb/day, proving again that U.S. refiners are pulling out all the stops to sell into this extraordinary margin environment. That record production along the Gulf Coast is not just impressive given that multiple plants experienced power outages due to the storm, but also because a 260mb/day refinery was permanently closed last year. PADD 2 fell from its all-time high last week but is still operating above 100% utilization and sitting at a seasonal high. All PADDs but 5 are running at above average rates and the total U.S. set another fresh seasonal high last week.

Total U.S. diesel stocks improved in back-to-back weeks but are still about 17 million barrels below the 5-year average. The build came off import/export flows and production increasing to an 8-year seasonal high to offset the uptick in demand. PADD 1 took the bulk of the imports last week and posted the largest stock increase, but inventories are still well behind prior years.

Gasoline stocks also increased on the net of import/export flows, but demand declined heading into the holiday weekend while production took its typical nosedive for this week of the year. PADD level changes were mild outside of PADD 3 with all holding well below average inventories and the total U.S. is still hanging around 14-year seasonal lows despite last week’s build.

Jet fuel stocks built again with import/export flows offsetting slightly increased demand. Production fell a bit but stayed at a seasonal high. Again, PADD 3 was the main driver of the build with inventories moving back up to 8-year seasonal highs. All PADDs except 4 continue to hold above average stocks and the total U.S. is running about 3 million barrels over year-ago levels.