Happy Friday!
Oil is ending the week around $85 a barrel, up more than 20% from where it started Monday. This was one of the most alarming weeks of the entire Iran conflict. The brief peace deal that looked promising three weeks ago has completely unraveled. Six straight nights of U.S. airstrikes, Iranian missile attacks on American bases across the Gulf, cruise missile strikes on UAE tankers, Iran’s first direct attack on U.S. facilities in Syria, and now a credible threat to close both the Strait of Hormuz and the Red Sea simultaneously. The market spent all week trying to catch up to events that nobody expected to happen this fast.
Monday started badly. Over the weekend, Iran had targeted U.S. military facilities across the Gulf and declared the Strait of Hormuz closed again. Monday morning brought fresh news that Iran’s Revolutionary Guard had attacked U.S. bases in Kuwait and Bahrain. Ship-tracking data showed only six vessels transited the strait on Sunday. That was the lowest single-day count in five weeks. Oil surged more than 3% on the open. The Iranian oil that briefly flooded the market during the ceasefire window is now sitting idle at sea, floating in limbo. Iran’s oil is stuck not because of sanctions alone but because the buyers it was counting on found better deals elsewhere. Another interesting report was that the DOE officials announced that the Strategic Petroleum Reserve’s aging infrastructure is being held together with Band-Aids. The 60 Gulf Coast salt caverns were built in 1975, and investment in maintaining them has not kept pace with the demands being placed on them. At current levels, pumping oil out of the caverns is becoming difficult and there are potential dangers of refilling them at these lower levels.
Tuesday was the heaviest single day of military exchange since the war began. Iran struck two UAE tankers with cruise missiles in the Strait. The UAE has been running record production of over 4 million barrels a day in large part because of this improvised system moving shadow tankers. One Indian crew member was killed and eight others wounded. Iran also fired ballistic missiles at a U.S. air base in Jordan, and the U.S. struck back with five hours of attacks on Iranian targets. Yemen’s Houthi movement fired missiles at Saudi Arabia, adding another thread. Trump reinstated the full U.S. naval blockade of Iranian shipping. Asian refiners responded by actively looking to replace Middle Eastern crude with American oil. Japan, South Korea, and India are all in the market for U.S. barrels. The June Consumer Price Index came in at 3.5% year-over-year, better than the 3.8% economists expected and down sharply from 4.2% in May. But I would not read too much into that. Most of that improvement reflects the drop in gasoline prices during the brief ceasefire window in June.
Wednesday pushed WTI above $80 a barrel for the first time in weeks. The U.S. launched another wave of strikes. Iran struck back at U.S. bases in Bahrain, Kuwait, and Jordan. Iran then threatened directing its Houthi allies in Yemen to close the Bab el-Mandeb narrow gateway at the southern end of the Red Sea. The Strait of Hormuz carries roughly a fifth of the world’s oil. The Bab el-Mandeb is how that oil gets to Europe and the Atlantic. Threatening both points simultaneously is not something the market has ever had to price in before. The EIA weekly report showed crude stocks fell 1.7 million barrels to 409 million barrels, which is still 6% below the five-year average. Gasoline dropped another 1.5 million barrels and is 8% below average. Diesel stocks rose 4.6 million barrels, which is good news. An interesting data point out of China noted that crude oil imports fell 41% in June compared to a year ago. And China drew down its strategic reserves at a pace 85% faster than in May just to keep refineries running. When that restocking demand eventually arrives, it will add significant pressure to an already stressed global market.
Thursday brought oil to its highest level in about a month, holding near $83 after surging roughly 12% over the prior three sessions. The fifth consecutive night of U.S. airstrikes on Iran kept pressure on prices. Only seven ships crossed the Strait of Hormuz on Wednesday, down from thirteen the prior day. Iran declared Hormuz an inviolable “red line” and warned that if Trump carries out his threat to bomb Iranian power plants and bridges, it will retaliate against all energy infrastructure across the Gulf. Houthi forces in Yemen have already completed preparations to close the Bab el-Mandeb, deploying missiles and drones in Yemen. Saudi Arabia has been rerouting roughly 7% of global energy supplies through its East-West pipeline to the Red Sea port since the Hormuz closure began. If that bypass gets cut simultaneously, the supply shock would be historic. A drone also struck a tanker at Iraq’s Basra export terminal on Thursday, briefly forcing a suspension of all crude loadings. The U.S. reportedly struck a supertanker near Iran’s main export terminal in the Persian Gulf. Both sides are now targeting energy infrastructure directly, not just military assets. I do not expect prices to stay calm if Iran follows through on either the power plant threat or the Red Sea order. I am watching both very closely.
Friday confirmed the direction of the week. Oil rose more than 2% as the U.S. and Iran traded strikes for a sixth straight night. Only three commercial vessels crossed the Strait on Thursday. This was the fewest single-day crossings since May. And for the second straight day not a single large crude carrier or fuel tanker made it through. Some crews are simply refusing to make the trip regardless of pay. Iran expanded the conflict overnight to Syria. This was the first direct attack on U.S. facilities there. And they struck a Kuwaiti power generation and water desalination station. That signals Iran is willing to threaten the stability of its neighbors beyond shipping. On the domestic supply side, U.S. refiner margins hit a fresh record high for the third straight session. Demand for American refined products from overseas buyers has pushed U.S. fuel exports to record levels. That is welcome for producers, but it means domestic fuel stockpiles are being drawn down to supply the world, which pushes gasoline and diesel prices higher for everyone here at home. Midwest farmers are feeling this right now during the height of summer operations.
The Chicago spot market moved sharply higher with crude prices this week. Gasoline jumped over 20 cents a gallon and diesel over 40 cents. I expect prices at the pump to move meaningfully higher heading into next week. One thing I am watching closely is that Chicago diesel is currently trading about 60 cents a gallon cheaper than NYMEX heating oil, which is an unusually wide gap. With refiners running highest possible capacity on diesel, if Chicago gets tight on supply at all, that basis could explode another 30 to 40 cents in a hurry. The Group spot market is also showing weak diesel basis right now, which tells me supplies are currently healthy. But it would not take much of a disruption to change the situation quickly. Gasoline basis is a little soft but nothing that has me worried at this point.
Propane prices appear to have found a floor and have been stable this week. Given everything going on, I only see potential upside for propane heading into the winter heating season. I do not think the upside is as dramatic as it has been in some past years, but that can change quickly during periods of high demand when logistics get strained. Even with fundamentals looking somewhat comfortable right now, I still recommend locking in some heating gallons for next season while you can. And if you are able to top off your tank this summer, it will lower your cost average for the year.
As always, if you have any questions please feel free to give us a call. Have a great weekend!
Best regards,
Jon Crawford
Sources: Bloomberg, Reuters, Wall Street Journal