Middle East Stalemate And Refinery Troubles Push Diesel Higher

Diesel futures are leading another rally in energy markets to start the week as the Middle East stalemate continues, offering little hope that the supply squeeze will end anytime soon. RBOB and Crude oil futures are resisting the pull higher so far, with RBOB ticking modestly lower, while crude oil prices are only up 60-80 cents/barrel, while ULSD futures trade up more than 6 cents/gallon.

KPLER is reporting that transits through Hormuz dropped even further last week, with just 3 vessels total making their way through on Sunday. The note showed Bab El Mandeb transits increasing last week, despite multiple attacks that killed 6 sailors the previous week. The Houthi’s launched more attacks against port cities near the Red Sea over the weekend, targeting Yemeni government forces, but there have not been new attacks against Saudi infrastructure since Friday. The 60 day “MOU” between the U.S. and Iran officially expires today, although for all intents and purposes it’s been dead for more than a month.

It’s been 4 days since a Ukrainian drone strike on Russian refineries, breaking the record-setting pace of attacks to start the month. Don’t be fooled into thinking the lack of refinery strikes suggests a slowdown in total drone activity though, as Ukraine launched one of its largest attacks of the 4.5 year war Saturday night, striking numerous logistical facilities, and a rocket-fuel manufacturer. Russia meanwhile has stepped up its campaign targeting Ukraine’s natural gas production, with more than a dozen strikes reported in the past week.

Back on the bandwagon. Money managers were adding to their net length (bets on higher prices) across the board in petroleum markets last week, with a combination of new long positions and short covering. Brent crude continues to see the most action, with nearly 52,000 contracts of new length added by the large speculative trade category during the reporting period (which ended Tuesday, right after Monday’s huge rally) while more than 24,000 short positions were covered.

Delek reported another upset at its 73mb/day Big Spring TX refinery over the weekend, as an equipment failure in a boiler forced an FCC unit to be placed in “Full Burn” causing 3 hours of flaring. This refinery in particular has been struggling to maintain normal operating rates this summer, with 4 TCEQ filings in the past month. In addition, Marathon El Paso and P66 Borger have also had issues lately, all of which seem to be contributing to another round of tight supplies in the W. Texas/NM region, with several terminal outages reported in the past week.

Baker Hughes reported a net increase of 1 oil rig and 4 natural gas rigs drilling in the U.S. last week, while the Primary Vision count of fracking crews fell by 3, erasing the prior week’s increase. A note from RBN Friday highlighted how the latest increase in natural gas takeaway capacity from the Permian is helping allow for more production in the region after years of being capped out by simply producing more gas than the pipelines could handle, which frequently pushed prices in W. Texas into negative territory.