Happy Friday!
Oil is ending the week near $84 a barrel, up about 20% for the month of July. The market swung between optimism and fear almost every single day. A pause in U.S. strikes early in the week sent prices down sharply. Then the fighting came right back, the Houthi naval blockade of Saudi Arabia got more aggressive, and oil climbed back toward where it started. The pattern of this war keeps repeating itself. Here is what drove the market this week.
Monday started with the clearest diplomatic signal in weeks. Iran’s foreign ministry said the country is open to resuming negotiations with the U.S. Oman had formally presented Iran with a proposal to manage the Strait of Hormuz that would let Tehran collect voluntary fees for ships using it. Trump said the U.S. and Iran are having good talks and paused airstrikes specifically to give negotiations a chance. Oil dropped sharply on the news, at one point down more than 8% as the biggest single-day decline in more than three months. Then reality crept back in. Iran struck Saudi Arabia, Jordan, and Iraq with drones on the same day that Trump was calling for talks. The Houthis hit Saudi Aramco’s 400,000 barrel per day Jizan refinery over the weekend, forcing it to shut down. The pattern of this war has been: talk surfaces, oil drops, talks go nowhere, strikes resume, and oil climbs back. We have been through that cycle enough times that there is caution on any news stories. We are definitely dug in on “believe it when I see it.”
Tuesday added pressure from several new directions. A tanker was struck in the Strait while attempting to cross. The ship-to-ship transfer network that had been the Gulf’s main workaround slowed significantly following the latest Iranian attacks. And the Houthi threat to Saudi Arabia’s Red Sea export route increased. Saudi Arabia has been routing oil through its East-West pipeline to Yanbu precisely because Hormuz is no longer reliable. If the Houthis close that route too, the kingdom loses both of its export pathways at once. The diesel picture continued to decouple sharply from gasoline. U.S. refiners are producing distillate fuel at a near record, exporting massive volumes to South America and Europe. Gasoline is paying the price. Output is below the five-year average, inventories are the lowest for this time of year since 2012, and pump prices are back above $4 a gallon. Refiners have every incentive to keep running hard on diesel as long as margins hold from tight world supplies.
Wednesday was the week’s most volatile day. Oil jumped nearly 5% after fighting flared back up. The U.S. and Saudi Arabia struck Iran-backed armed groups in Iraq. These were the first U.S. strikes since the pause began last weekend. Iran fired ballistic missiles at American forces in Jordan. Iran also rejected Oman’s joint management proposal for the Strait. The EIA weekly report showed U.S. crude inventories fell 7.2 million barrels, leaving stocks about 7% below the five-year average. Refineries ran at 97.2% of capacity, which is near a record. The Fed held interest rates steady in a range of 3.5% to 3.75%. Even though there was not a rate increase, Treasuries rocketed to record highs and the dollar gained strength as well. The one cushion nobody expected: China’s crude imports continue to dwindle. If China was at full-steam imports, things would look considerably worse.
Thursday brought more of the same. There was fighting and diplomacy running side by side with neither gaining momentum. The U.S. hit dozens of Revolutionary Guard targets inside Iran overnight. Talks between Oman and Iran over Hormuz management were trying to start up again, but Iran was showing no signs of softening. Hormuz shipping picked up slightly. 14 commodity vessels crossed in both directions on Wednesday, up from single digits the week before. Tankers are starting to get booked at nearly $500,000 a day just to pick up a Gulf cargo for China. If shipping rates increase to more fleets, we will see energy prices go higher based on increased shipping cost. U.S. GDP growth slowed to a 1.5% annual rate in the second quarter, below expectations and down from 2.1% in the first quarter. Saudi Arabia’s and China’s economy posted contraction at rates not seen since Covid. The contractions put downward pressure on oil prices even though bullish geopolitical factors are getting worse.
Friday ended the week with oil still elevated near $84. Iran’s Revolutionary Guard stopped two tankers from crossing the strait and four more changed course rather than risk it. The Houthis are now reportedly working with Iraqi armed groups to attack Saudi Arabia from inside Iraq. A drone strike set two vessels on fire at Egypt’s Damietta port, raising concern about the Suez Canal. The Suez Canal is one of the last major export routes still partially open for Saudi oil. The SPR remains at its lowest level in more than four decades, and Energy Secretary Chris Wright said another major release is not on the table once the current release wraps up.
The Chicago spot market rolled from the August to the September prompt contract this week, which showed a bit of predicted tightness but nothing alarming. Although Phillips 66 refinery had a fire and needed to cut production, the price fallout has been minimal. Diesel prices jumped 30 cents a gallon on the week as crude oil climbed with renewed fighting across the Gulf. Gasoline held fairly steady after a big move last week and I expect it to level out by end of the weekend. Diesel is a different story. I do see prices moving higher from here. Hopefully not above $5 a gallon, but that will depend on how next week develops. There are no major refinery maintenance events planned, and diesel production should increase in time for harvest season. But the market is tight and it would not take much to push things higher.
Propane moved in tandem with crude oil this week. With renewed fighting targeting oil export terminals and multiple straits simultaneously, propane has real potential to move higher once demand picks up heading into fall. I continue to recommend topping off your tank and contracting some heating gallons for next year while you have the opportunity. Give our office a call and we will walk you through your options.
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