Energy Rally Gains Steam As Global Supply Chain Pressures Mount

Energy markets are off to another strong start with gains in the 3-4% range this morning following another round of escalating violence in the Middle East over the weekend.

Kpler reported this morning that crossings through the Strait of Hormuz were cut by more than half over the past few days as fighting flared up and activity via the IMO and Oman routes “almost disappeared” following Iran’s latest attacks on vessels using those alternate routes.

OPEC’s monthly oil market report showed the cartel’s output recovered by around 3 million barrels/day in June, which accounts for around 1/3 of the lost production due to the war. One key note is that the UAE accounted for more than half of the gains, but they won’t be part of the cartel going forward. The monthly report made a small reduction in the oil demand forecast, while holding the supply forecast steady as the cartel continues to try and delicately handle the fact that several of its members are lobbing missiles and drones at each other.

Refined products continue to lead the move higher, with crack spreads hovering near record highs (much to the chagrin of the President and Treasury Secretary) even after removing the record high costs of compliance with the Renewable Fuel Standard that’s taking about $16/barrel away from the margin for obligated products. Delta Airlines highlighted how its refinery operation helped offset the impact of dramatically higher fuel prices in the 2nd quarter, while suggesting that the temporary downtime due to an upset at the facility in June will have only a minimal impact on earnings.

Money managers were making modest decreases in the net length held in most energy contracts last week with WTI, Brent, ULSD and RBOB all seeing modest reductions, while the European diesel contract saw a healthy influx of new length added, likely due to the combination of increased demand from the heatwaves and reduced supply from refinery issues in the region.

In total, there were a combined 16,000 new speculative short positions added in the latest reporting period, just before the big rally started last Wednesday, and the total speculative shorts held in the Brent crude contract were hovering near record highs, suggesting that at least some of the move higher is coming from big money managers being forced out of losing bets on lower prices.

The 265mb/day Sweeny TX refinery reported upsets at 5 units caused by a sudden interruption of electrical power on Saturday. The filing with the TCEQ suggests the units were all restored by Sunday morning.

A fire was reported at Marathon’s 307mb/day Cattlesburg refinery over the weekend. The cause and effect of the fire have not been reported at this point, but the company stated that there were no injuries or offsite impacts, and the blaze was extinguished.

PBF’s 166mb/day Torrance CA (Los Angeles area) refinery announced it was planning 8 days of flaring starting this morning following an unplanned upset at the facility last Wednesday. Energy News Today reported last week that the facility was impacted by a partial power loss but all operating units were still functioning.

Tropical activity remains quiet in the Atlantic basin with Colorado State forecasters lowering their hurricane outlook for the year to the least active in a decade thanks to the impacts of a rapidly developing El Nino in the Pacific. That phenomenon is helping to push a widespread heatwave across parts of the U.S. however, which could create its own issues as refineries that weren’t built to withstand triple digits, and as we’ve seen over the past week, a strained power grid can also disrupt those facilities.

Ukraine continued its assaults on Russian energy infrastructure over the weekend with multiple units at the 180mb/day Syzran refinery reportedly struck by drones, along with a fuel depot and numerous tankers in the sea of Azov, further isolating Crimea. A Bloomberg report this morning says that Russian refinery runs are at their lowest levels in more than 20 years due to the impacts of these attacks.

Baker Hughes reported that the total U.S. oil and natural gas rig counts held steady at 445 and 126 active rigs respectively, with increases in Louisiana and TX helping to offset a drop of 4 rigs in New Mexico. In total, the Permian basin dropped 4 rigs last week.

The Primary Vision count of fracking crews dropped by 5 last week, wiping out the prior week’s 5 crew increase.