Supply Lines Under Fire: What This Week's Attacks Mean For Oil And LNG Markets

Energy markets are taking a breather after 2.5 days of huge price swings. Diesel prices have had another casual 33 cent price swing overnight as traders digest reports that the U.S. Navy may be gaining the upper hand in the world’s most important shipping lane, while shipping insurers will soon find out if the pen is truly mightier than the sword.

After another huge rally yesterday, we saw a short lived price reversal following the settlement when the U.S. President announced orders to offer political risk insurance and naval escorts to get traffic flowing through the Strait of Hormuz again. The rapid price recovery later in the afternoon suggests the market is taking an “I’ll believe it when I see it” approach to the social media posts.

If you want to see a visualization of the chaos faced by shippers in and around the strait, click here.

If you’re among the many that are hoping the U.S. Navy will quickly get the upper hand in controlling the strait, this guy has good news. The naval activity isn’t limited to the strait either, with reports this morning of an Iranian ship being sunk by a U.S. submarine off the coast of Sri Lanka.

Saudi Arabia said it intercepted another drone attack on its 550mb/day Ras Tanura refinery overnight. That facility was closed as a precaution earlier in the week following a drone attack and a lack of takeaway capacity due to the closure of the strait.

Adding to the global squeeze on LNG that’s already causing some Asian nations to ration their supplies: Ukrainian drones apparently attacked and sunk a Russian LNG carrier in the Mediterranean Sea overnight, stretching the distance of that war’s impacts yet again. While attacks on Russia’s shadow fleet aren’t new, the sinking of an LNG ship is more impactful given the specialized equipment needed to transport super-chilled natural gas, vs an oil tanker.

A study published by the Baker Institute this week highlights how Ukraine’s “Kinetic Sanctions” on Russia’s energy supply network is influencing the export markets along with the “Paper sanctions” levied by the U.S. and some European allies.

The price action this week has pushed refining margins for diesel to 3 year highs for most U.S. facilities, which should help the industry end the quarter on a very strong note, similar to what we saw last fall.

In other news no one really cares much about this week:

The API reported builds in crude oil and diesel inventories last week of 5.6 million barrels and 516 thousand barrels respectively. Gasoline stocks were estimated to draw by 3.3 million barrels. The DOE’s weekly status report is due out at its normal time this morning.