Energy Markets Retreat On Diplomatic Optimism As Supply Risks Evolve

Energy markets are seeing a modest wave of selling Tuesday with negotiations underway in Tehran between Saudi Arabia and its Mecca Defense partners and Iran getting credit for the pullback as hope for optimism temporarily puts the concern of an inevitable restart in the Iran war on the back burner for now.

Monday’s session was highlighted by even more choppiness than normal with ULSD passing the break even mark at least a dozen times, vacillating between nickel gains and losses throughout the morning before ending the day with more selling. The low $5 range continues to offer chart resistance, with the October contract unable to settle above that level despite trading above it intraday in 4 of the past 6 sessions.

Ukraine has continued to abstain from striking Russian oil refineries as it negotiates with the U.S. for assistance, while continuing its furious pace of drone attacks elsewhere.

The Houthis claim to have hit Saudi Arabia’s largest refinery, the 550mb/day Ras Tanura facility along the Arabian Gulf Coast. The damage done is not clear, but that facility is also home to Saudi Arabia’s main crude oil loading terminal, and the fact that it was still struck is telling of the challenges the kingdom is having defending its assets.

The UKMTO reported a ship on fire off the Iraqi coast in the North East corner of the Persian Gulf Monday, and while it labeled the event as “suspicious activity” it did not confirm it was an attack. October has already seen more ship attacks than any other month since the war began, with Iran apparently taking advantage of its window where the US has promised not to attack prior to the election. The charts below give more color to the reported ship attacks over the past 7 months, while showing how the volume still lags far behind the level of violence in the Black Sea.

Brad Cooper (CENTCOM, not Hangover) issued a statement Sunday saying that 95% of all ships navigating Hormuz have sailed through safely as the U.S. has escorted 1.5 billion barrels of oil exports since the summer. In other words, you’ve got a 5% chance of being hit by a missile, drone, sea mine or RPG if you make a run for it.

The next war? A KPLER report this week suggests a price war amongst gulf oil producers is starting to bubble up as producers try to make up for lost time now that oil tankers are sneaking through Hormuz on a consistent basis. The UAE leaving OPEC to produce what it wants creates a major showdown with its rivals in Saudi Arabia, but reports this week suggest Iraq is also heavily discounting barrels as well. The advantage for those producers is that even with $28-30/barrel discounts to benchmarks, they’re still getting a higher price than they were prior to the war breaking out, so they can afford to subsidize the insurance premiums and tanker rates that have gone through the roof since the drones started attacking ships. Where it will get interesting is to see what happens whenever the shooting war ends and the neighbors battle each other for market share.

Saudi Arabia is already looking ahead, making plans to set up a Singapore storage hub that it can fill during the inevitable price crash that will help its buyers (and its Chinese refinery Join Ventures) weather any future supply storms.

Chicago gasoline prices have dropped nearly $1/gallon in the past 2 trading sessions as concerns over last week’s upset at Exxon’s 275mb/day Joliet refinery have quickly faded into the rearview and physical barrels rolled to November delivery cycles.

Marathon on Monday reported an upset in a coker unit at its 630mb/day Galveston Bay (Texas City) refinery from last Thursday, but that event lasted less than an hour and normal operations were resumed quickly.