Fuel Futures Jump As Hormuz Risks Return To The Spotlight

War on? Oil and diesel futures are trading up 3% this morning after the U.S. and Iran traded attacks over the weekend, breaking the relatively peaceful stalemate that had held for most of August.

U.S. CENTCOM referred to its strikes as “limited, precise action against IRGC minelaying forces…” rather than a resumption of a wider military campaign.

The IRGC retaliated with a missile attack aimed at Jordan, and a drone attack aimed at the UAE, with early reports suggesting all were successfully destroyed before reaching their targets. The IRGC is also claiming that a tanker is on fire in the strait this morning after it struck a mine while using an unauthorized route, but the validity of those claims appears suspect at this time with no other sources confirming them.

Today is expiration day for September RBOB and ULSD contracts, which always brings about a bit of volatility and confusion as trading winds down. Be sure you’re watching the October contracts (RBV and HOV) if you’ve not already shifted for price direction today. The September RBOB contract looks particularly susceptible to some fireworks today as the premium to October has spiked north of 40 cents/gallon, while only 200 contracts have traded hands overnight, compared to more than 9,600 for the October contract. That steep backwardation in futures is also causing plenty of consternation in physical markets with big swings in differentials as cash prices adjust to the huge spreads in futures, and the EPA’s latest round of waivers moved up the fall RVP transition by several weeks.

There’s a tropical system heading towards the country’s largest refineries this week, and while the NHC is giving 70% odds of development, forecasts suggest it won’t have enough time over the water to become a major storm. Power outages will be a concern as the storm passes Tuesday morning, but beyond that this storm “should” be a non-issue for supply. The remnants of Dolly meanwhile are still moving towards Miami, but only give 20% odds of redeveloping this week.

Ukraine hit Russia’s 2nd largest refinery with a drone attack over the weekend, just after the facility had completed repairs to damage done by strikes last spring. Damage at the refinery near St. Petersburg is unclear at this point, although a fire was reported by multiple sources. That attack marks 23 for the month of August by our estimates, breaking the record of 20 set in July, which broke the record of 13 set in June.

RIN values jumped nearly 40 cents on Friday following reports that the White House was considering plans to increase the RVO to help offset the small refinery waivers that are set to be announced today. The past 7 days saw RINs trading at $2.25 on Friday the 21st, then drop to $1.60 Thursday before ending the week back at $2.15 all due to speculation on what the EPA will actually do.

The CME’s Fedwatch tool showed the immediate market reaction to the new FED Chairman’s speech from Jackson Hole Friday, in which he suggested the central bank may have more work to do to try and tame inflation. The probability of a 25 point rate increase at the FOMC’s meeting September 16th jumped up to 64% from 35% prior to the speech, while the odds of 2 or more rate increases by year end increased to 48% from 28% the day prior to the speech.

Maybe they’ll declare another “Code Red”. The farce of Freedom Fuel made more headlines over the weekend after a lawsuit from their fuel supplier for not paying their bills was uncovered. The company blames the fuel supplier for incorrectly invoicing them according to the reports.

Friday’s announcement that the U.S. and Venezuela had agreed to a deal to develop more oil reserves made plenty of headlines, but the chart below that shows that the projected output increases for the “biggest oil deal in the world” barely register on the global stage with only around 250mb/day more production expected in 5 years.