Energy Prices Rally As Peace Talks Fail And War Risks Escalate

Energy markets are off to the races Monday, following the biggest weekly drop since the COVID lockdowns, as peace talks between the U.S. and Iran broke down over the weekend. The U.S. President announced a naval blockade as the next step in the war, while the 2 week ceasefire seems to be holding for now.

One key clarification from the U.S. Military: U.S. Warships will NOT impede ships sailing through the Strait of Hormuz, despite the President saying they would Sunday morning. The U.S. military will impede Iranian port activity all along their coastline, while simultaneously trying to clear the strait for transit.

One interesting note about today’s rally, even though ULSD (HO) futures are trading up more than 30 cents from Friday’s settle, the daily trading range is less than 12 cents/gallon as the contract gapped higher at the open Sunday night but hasn’t moved a whole lot since. It’s also worth noting that despite the break-down in peace talks and declaration of a new Hormuz blockade, diesel prices are still 50 cents lower, and oil prices are still trading $15-$17/barrel lower than they were before the cease fire was announced last week.

Money managers continue to show mixed reactions to the volatility making small reductions in net length in most contracts ahead of last week’s sell-off, with WTI the exception to the rule, seeing more length added on the week. Open interest in refined products continuing to plummet as rapidly rising margin requirements from the CME combines with backwardation to make shipping a risk not worth taking for many. Open interest in Brent crude saw a healthy pullback last week after reaching a record high the week prior, but in general crude OI remains elevated.

Baker Hughes reported the oil rig count in the U.S. was unchanged last week, with a drop of 3 rigs on land being offset by a 3 rig increase offshore. The natural gas rig count dropped by 3 on the week. The Primary Vision count of fracking crews increased by 5 on the week to a total of 171.

What a difference between gasoline prices and natural gas. While soaring gasoline (and diesel) prices are grabbing many headlines and already starting to shift some consumers’ behavior, Nat Gas futures saw their lowest settlement in nearly 18 months Friday as domestic production continues at record levels even though rig counts remain relatively low, and the country’s capacity to freeze that gas to export as LNG is maxed out despite recent expansions. Meanwhile, Liquified Natural gas prices in Asia have doubled since the war started.

The story for crude oil, diesel and gasoline is much different simply because those liquid fuels are much simpler to transport than natural gas, and the U.S. has transitioned from the world’s biggest buyer of petroleum 20 years ago, to its largest seller today. The demand for prompt replacements of the lost supply from the Persian Gulf is keeping values elevated on the East, West and Gulf Coasts, while the middle of the country is still dealing with excess supply in most cases as most of that volume can’t reach the international marketplace.

I guess they’re not coming back: Lyondell’s 268mb/day Houston Refining complex that shut down permanently early last year reported an emissions event Sunday as workers demolished a coker and adjoining units at the facility.

Pemex reported a diesel leak at its dock on the Houston ship channel Sunday near its Deer Park TX refinery they bought from Shell a few years ago when Shell was pretending to go green. Response teams in the area deployed booms to contain the leak and it appears that operations in and around the channel are continuing unimpeded.