Energy Prices Climb As Supply Disruptions Threaten Summer Inventories

Energy markets are seeing a strong rally for a 3rd straight day following the worst fighting since the U.S.-Iran ceasefire began 6 weeks ago.

U.S. diesel prices are already up more than 32 cents/gallon this week, while oil prices are up more than $9/barrel, erasing a good portion of the heavy losses we saw in May when optimism for a deal was running rampant.

RBOB gasoline futures are lagging the rest of the complex this morning, trading up “only” 4 cents/gallon vs 14 for ULSD, in an apparent nod to Tuesday’s API inventory report that estimated a build of 3.5 million barrels last week, while crude oil stocks dropped by 6.8 million barrels and diesel inventories declined by 214,000 barrels. The holiday hangover effect is likely at play with the gasoline inventory reading as a surge in demand ahead of the first driving holiday of the season is followed by folks with full tanks and nowhere to go. The EIA’s weekly update is due out at its normal time this morning.

The IEA continues to sound the alarm that the worst is not behind us in this supply disruption, predicting that inventories may reach “critical” and “historically low” levels this summer, and that even IF the Strait is opened tomorrow, it will still take 6-8 months for supplies to recover. While the agency built to counteract OPEC tends to err on the side of hyperbolic warnings, the statement echoes those from the world’s largest oil producers and traders this time around.

A Bloomberg note this morning suggests that some tankers are jumping on board the optimism bandwagon that helped push oil prices down nearly 20% in May, staging tankers just outside of the Persian Gulf in an apparent bet that the straight may soon open, while a pessimist may suggest they’ve got nowhere else to go to load.

Ukraine struck a Russian Oil export terminal in St. Petersburg overnight, a timely attack that will disrupt both oil exports via the Baltic, and Russia’s economic forum that started today.

Venezuela has been one of the big winners of the supply crisis, with it’s export volume increasing to a multi-year high under the new U.S.-supported regime, just in time to capture higher values. On top of those benefits, the country is also reportedly seeing its discount to Brent shrink now that China is not its only buyer, adding another $10/barrel to its revenues. All that said, the increased production in Venezuela only offsets around 4% of the supply that’s lost daily from the strait of Hormuz. See the tables below for more detail.