Peace Prospects Pressure Crude While Fuel Credits Rally

There was a notable tick up in wholesale demand on Saturday as it appeared that the U.S. and Israel were about to launch another large coordinated wave of attacks on Iran, only to see a big pullback in prices when markets reopened Sunday after those attacks were called off.

Traffic through Hormuz remains severely limited, while the reductions through the Bab el Mendab strait aren’t as severe so far. Saudi Arabia is preparing a coalition to try and end the threat to their backup outlet for supply, which some believe includes another land war in Yemen.

While the focus for futures is clearly on peace prospects this morning, Ukraine is not letting up in its campaign to leverage energy supplies to defeat Russia. After July smashed the monthly record for refinery strikes with 20 confirmed hits in 31 days, we’ve already seen 4 confirmed strikes in less than 3 days to start August. Most of the weekend strikes focused on a cluster of refineries in the UFA region that combine for nearly 500mb/day capacity, and one of the 3 plants was reportedly struck for the first time in the war.

Hedge funds had a mixed reaction to the mixed price action in the latest CFTC report making small reductions in their net length (bets on higher prices) in Brent and ULSD contracts, while RBOB and Gasoil saw small increases for the week ending Tuesday July 29. WTI saw the largest change week on week with large speculators liquidating more than 15,000 short bets, while adding more than 5,000 contracts of new length to increase the total net long position by 24%.

California’s LCFS credits spiked to their highest levels in more than 3 years Friday, following the latest program reports that showed credit generation dropped in most categories, most notably Renewable Diesel last quarter. What’s that mean anyway? For drivers in California, the cost of complying with that program is now around 27 cents/gallon for diesel, up from around 18 cents to start the year, while the gasoline tax for this program has gone from around 16 cents to start the year to 24 cents today.

The divergence between LCFS generation from Renewable Diesel in CA compared to the record high domestic generation of D4 RINs in the past quarter seems incongruous, and is due in part to the revised LCFS program offering fewer credits/gallon to renewable producers (while raising the deficit/gallon for traditional fuel use) along with the glut of supply forcing producers to find alternate homes for their product outside of CA.

Money managers seem to have missed the rally in LCFS credits as they’ve made essentially no change in their contract holdings this year. They also missed out on the record setting rally in RIN values, as they reduced their net length in D4 RINs dramatically even as prices rallied from around $1.10 to start the year to $2.50 a few weeks ago. The good news for those hedge funds who’ve clearly missed the credit plays this year is they’ve so far not been hit too hard by the 40 cent drop in RIN prices over the past 3 weeks. See charts below from the CFTC’s weekly COT report on credit positioning by money managers.

Baker Hughes reported a net increase of 1 oil rig active in the U.S. last week (451 total oil rigs) while the natural gas rig count held steady at 127. The Primary Vision count of fracking crews active in the U.S. dropped by 4 on the week to 194.

Marathon reported an upset at its 630mb/day Galveston Bay (Texas City) refinery Saturday caused by a leak in an overhead condenser in an FCC unit. That upset lasted a little over 10 hours, and it appears that they were forced to slow runs in the unit to address the problem based on the filing.

Flint Hills reported an upset at its 350mb/day Corpus Christi west facility Saturday with a trip in a sat gas unit due to unknown causes. That event lasted 2 hours and did not appear to impact production according to the filing, although the cause is still under investigation.