Escalation And Uncertainty Fuel Energy Market Swings

Energy markets had another busy overnight session with prices seeing a strong rally after Israel and Iran both launched new attacks over the weekend that were clear escalations in their war, which made the U.S. President look a bit like the boy who cried peace. Prices topped out around 3am with diesel futures up 20 cents, and gasoline up 13, but have cut those gains by more than half after the IRGC declared its offensive operation against Israel was over, although other reports suggest that Israel has already resumed strikes within Iran this morning which could cause things to escalate once again.

OPEC & Friends announced another increase to their output quotas, in a symbolic gesture that says the cartel is happy to sell as much oil as possible at current price levels, even as their actual output remains somewhere around 9 million barrels/day (30%) lower than their goal due to the impacts of the Iran and Ukraine wars. See the table below for a comparison of target vs actual production estimates.

Money managers were making modest additions to net length in NYMEX contracts last week with WTI, RBOB and ULSD all seeing small increases but ICE contracts saw large speculators reduce the net amount of money they have betting on higher prices. The most noteworthy trade was another healthy influx of new short positions (bets on lower prices) for Brent and WTI, with nearly 25,000 new contracts added during the week between the two. That’s the 6th straight week the large speculative category of trader has added more money to betting on lower oil prices, and although the net amount outstanding is still far from the record setting levels we started the year with (and proved particularly painful for some once the bombs started dropping) there is still a chance this building position could lead to a short-covering rally if those funds decide to exit.

Hedge funds seem unimpressed by the recent rally in RINs and California LCFS & CCA values with minimal changes in the managed money holdings on those contracts in the past few weeks even as RIN values hit record highs and environmental credits are approaching their highest levels in a year.

Baker Hughes reported an increase of 2 oil rigs active in the U.S. last week, marking the 6th consecutive week of increases to the oil rig count. The Natural Gas rig count dropped by 1 on the week, and the Primary Vision count of fracking crews dropped by 2.