Oil Markets Slip Amid Iran Deal Hopes Despite Tight Supply Signals

Energy futures are seeing another wave of selling Wednesday as signs of “progress” towards a deal between the U.S. and Iran seems to be pushing those betting on higher prices towards the exits.

The 16 cent drop in RBOB gasoline futures over the past 2 days may help the U.S. narrowly avoid having the highest retail prices ever heading into Memorial Day weekend, but it has not yet broken the bullish trend lines on the weekly charts, leaving the door open to an even bigger rally in the weeks ahead. The charts for diesel are similarly bullish, and yesterday’s big price reversal to end with healthy gains after big morning losses shows that the price action remains fickle.

The apparent optimism in futures markets also seems to be looking past the steadily deteriorating situation in physical markets near term.

The API reported a decline of 9.1 million barrels of crude oil inventory last week, despite production ticking higher and ongoing releases from the SPR. Gasoline inventories were estimated to drop by another 5.8 million barrels last week as we approach the official start to the unofficial driving season, while diesel inventories dropped another 1 million barrels. Exports for oil and refined products continue to hold at record highs, with no shortage of demand coming from countries desperate to replace supplies from the Middle East, with the only limitations coming from available ships and space to load them at U.S. ports, primarily clustered along the Gulf Coast.

An article from Kpler over the weekend highlights how U.S. refiners are already running in max-output mode during this huge margin and huge export demand window, which is fueling those record export levels, but also leaving the system vulnerable to upsets.

Speaking of which, the Chicago spot market continues to highlight how the extreme reactions of the stretched-thin supply network as a handful of hiccups at plants in the region have led to huge basis swings. Yesterday we saw deals in the Chicago ULSD market ranging from 75 cents to 110 cents over futures, even as the neighboring Group 3 market saw differentials plummet to a 20 cent discount to futures as planting season wraps up.

While no major refinery issues have been reported to support the rally this week, there are numerous market rumors of small hiccups at a half dozen plants in the region that have struggled to come back online fully from planned maintenance this spring. With a $1/gallon incentive to ship barrels into the market, there will be no shortage of long haul trucking interest, while pipeline shipments are limited with Gulf Coast origin points busy with export activity and shippers leery of the inevitable price collapse that we’ve already seen play out twice in the past month.

With the “running-all-out” status of U.S. refineries leaves the system vulnerable to upsets, it seems fortunate that early forecasts are calling for a less active hurricane season in the Atlantic which kicks off in less than 2 weeks. The flip side of that coin is the potential “Super El Nino” that’s the primary driver for fewer hurricanes being forecast, also increases the likelihood of more weather extremes on land that can still cause plenty of trouble for refineries as we’ve seen in the past few years.

Meanwhile, in “that other war” Ukrainian drones continue their ramped up attacks on Russian energy infrastructure with two major refineries reportedly forced to shut in the past 24 hours, while other oil export facilities have also been targeted. Those attacks are a big reason why some analysts suggest that even though the U.S. has once again eased sanctions on Russian oil exports as they grasp at straws to offset the impacts of the Hormuz shut down, the volume of oil flowing from Russian ports isn’t likely to increase.

Motiva reported an oil leak at its Pt Arthur TX refinery Tuesday, but that event does not appear to have impacted refining operations that the country’s 2nd largest facility.