Oil Trades Choppy Amid Conflicting Strait Reports And Regulatory Tweaks

It’s a mixed bag for energy markets Wednesday morning with mixed messages on the state of the strait continuing to stir choppy action in futures markets. Oil prices are holding near break-even at the moment after another see-saw overnight session. May ULSD futures are trading up around 6 cents after a big drop Tuesday, while May RBOB futures are down a couple of cents in the early going.

The U.S. government is saying its blockade has “completely halted” Iranian trade, while a Reuters article suggests shipping was “barely affected” based on the first full day of results. Other reports that the Chinese-owned tanker that reportedly made a break for it Tuesday has turned back around, suggesting that the long arm of the U.S. navy is at least having some of the intended impact to squeeze Iran back to the negotiating table.

Speaking of which, there are also unconfirmed reports that negotiations may soon restart in Pakistan, and the ceasefire has continued to hold, all of which continue to give energy futures and equity markets a reason to breathe a sigh of relief, which probably helps explain why the S&P 500 is nearing record highs despite concerns over inflation, rising interest rates and a slowing global economy.

The EPA Monday provided additional guidance to the RVP waivers it announced 3 weeks ago, in an attempt to provide clarity and get more states on board with their attempt to increase supplies and lower prices. The update highlights that a transition period will be provided when the waiver expires, which is key to allowing physical supplies to transition. The filing also explicitly states that butane can be blended into reformulated stocks under this waiver, and that CBOB can be redesignated as RBOB without retesting the fuel. So far a handful of states have jumped at the chance to avoid boutique blends, most notably Texas and Arizona, while many have not so the major pipeline systems on the east coast are not yet changing their schedules.

Not going anywhere for a while? San Francisco spot diesel has been continuously assessed at a 75 cent premium to May ULSD futures so far in April, but apparently that is only because there hasn’t been any trading in that market all month, compared to the more liquid LA spot market that has seen values plummet from an 80 cent premium to single digits over the past 2 weeks. That lack of liquidity in the Bay area seems to be a combination of RD now making up around 70% of the state’s volume, and only having 2 refiners left in the region capable of making CARB diesel. Theoretically, that lack of a market for CARB diesel has opened up a huge arb window to run barrels north from central and southern CA markets, but given the heavy discounting happening in renewable diesel and biodiesel markets, those opportunities may be much more limited than they appear on paper.

A Financial Times article earlier this week highlighted how many refiners were just now starting to feel the pinch 6 weeks after the war started as the first full shipping cycle without barrels from the Persian Gulf started to bite. A Reuters note this morning further highlights that point – and Europe’s continued vulnerability in the refined product markets – suggesting that despite record high fuel prices, refining margins on the continent are now turning negative. If that trend continues, refiners could actually be cutting runs due to economic reasons, even while large parts of the world are desperate for more supply.