Energy Markets Rebound Amid Lingering Uncertainty Over Iran Conflict

Energy markets are back on the climb Tuesday, following Monday’s hope-fueled selloff that still leaves more questions than answers on the war with Iran. The rally this AM is relatively modest so far in comparison to recent history with ULSD futures “only” up around 20 cents on the day, while gasoline futures are “only” up 12 cents so far.

While today’s recovery rally is a harsh reminder that talk is cheap, there are some signs that a limited number of tankers are transiting the Strait of Hormuz after checking in with the Iranians by transiting through a channel near their shores, which suggests the worst case scenario for global energy supplies is being avoided for now.

Calendar spreads for ULSD are showing what some energy executives have been warning about, that the physical supply damage hasn’t fully shown up in markets yet since vessels in transit when the war began are still making deliveries. The Premium for April/May ULSD is holding around 30 cents today (down from 36 to start the week) but the May/June premium is holding closer to 42 cents/gallon, which is a rare phenomenon both in the extreme backwardation, and relative strength compared to the prompt month spread.

Those spreads continue to wreak havoc on cash markets across the U.S., most of which don’t have anywhere near the tight inventory as east coast distillates. The Midwest continues to have the most extreme examples with Group 3 ULSD reaching a 93 cent/gallon discount to futures, while Chicago ULSD holds an 82 cent discount.

Gulf Coast basis differentials have been holding close to flat compared to MAY futures after making their roll, and may see more buying interest after an explosion and fire at Valero’s 435mb/day Pt. Arthur TX refinery. A shelter in place issued Monday night following the explosion was lifted around 6am this morning, while Energy News Today reports that a diesel hydrotreater at the facility is expected to be offline for an extended period due to damage from the blaze, which is particularly inconvenient given that diesel crack spreads are going for around $60/barrel right now.

That refinery is also adjacent to (Valero’s JV) Diamond Green’s RD facility which is the largest renewable production facility in the country. While details are scarce at the moment, it does not appear those operations were effected, and if the diesel hydrotreater next door is offline for a while, it’s possible that more hydrogen gets pushed over to RD production.

Los Angeles spot diesel values have also seen a strong rally in recent days, with diffs vs May trading up to a 40 cent premium to futures, and above the neighboring San Francisco spot market which has held a premium for much of the past year due to its ongoing refinery disappearing act.

RIN Values jumped back up north of the $1.50/RIN mark for D4 and D6 values Monday, after they’d seen a bit of a pullback last week. The February data released by the EPA showed a decline in ethanol RIN generation, and a lackluster tick up in D4 credit generation given the suddenly favorable economics for domestic producers owing to higher credit values and surging diesel prices.