Happy Friday!
What a week. Crude oil markets went from bracing for military strikes on Iranian energy infrastructure, to celebrating a two-week ceasefire, and then right back to worrying about whether the deal will hold. After one of the most dramatic weeks in energy market history, WTI crude is heading into the weekend near $98 per barrel. The ceasefire stopped the bombing, but it has not reopened the Strait of Hormuz, and the physical supply picture remains extremely tight.
Markets reopened Monday after the Easter holiday with all eyes locked on the April 7 deadline that Trump had set for Iran to reopen the Strait or face strikes on its energy infrastructure. The physical oil market was already sending loud warning signals. Oil price backwardation rocketed above $10 per barrel, one of the most important signals in the market, telling you that buyers were paying a steep premium to get oil delivered immediately rather than wait. That level of backwardation reflects genuine tightness in the supply chain, not just trader speculation. No deal with Iran had been reached, and the situation heading into Tuesday was as uncertain as it had been at any point during the conflict.
Tuesday brought the moment of truth. Trump’s deadline expired at 8 p.m. ET with no agreement in place. The Strait remained closed, and both sides had received peace proposals but neither had accepted terms. Iran had achieved its most important strategic goal within the first days of the war which was closing the Strait through which roughly 20 percent of the world’s oil normally flows. And there was no sign Tehran was ready to give that leverage up. Markets were cautious, with investors selling equity positions and buying oil as a hedge against further escalation.
Then came the dramatic turn on Wednesday. Less than 90 minutes before his own deadline expired, Trump announced a two-week ceasefire and suspended the threatened strikes on Iranian energy infrastructure. It was the most dramatic ultimatum of his presidency, and it ended, at least temporarily, with a pause in the fighting. Markets rallied sharply on the news and crude dropped hard immediately. However, I want to be clear about what the ceasefire does and does not change. It stops the bombing. That is significant. But it does not reopen the Strait of Hormuz. It does not repair damaged infrastructure across the region. It does not bring back the hundreds of tankers that have scattered around the globe. And it does not undo the inflation that has already worked its way into fuel, food, and freight costs. According to intelligence firms, there are currently 426 tankers carrying crude oil and clean fuels stuck inside the Persian Gulf alone. Getting all of that moving again is a massive logistical challenge even under the best conditions, and shipowners have made clear they will not send vessels back into the Gulf unless the two-week window is extended. They simply do not trust the pause will hold.
The ceasefire optimism faded fast on Thursday. Trump allies and senior U.S. officials told reporters they were worried the president had moved too quickly, and Iran’s public posture that is insisting it holds the upper hand heading into talks made Washington uneasy. Iran published a 10-point list of demands that included keeping control of the Strait of Hormuz, the right to continue enriching uranium, full sanctions relief, and the complete withdrawal of all U.S. combat forces from the Middle East. The U.S. called those demands nonstarters. Iran called the American proposal unacceptable. In addition, there was a strike on the East/West pipeline in Saudi Arabia after the ceasefire sending some jitters that the ceasefire will not be followed. At this moment, we are unsure of who struck the pipeline, but 600k barrels per day went offline. Physical crude markets began climbing again, and paper prices quickly bounced back toward where they were before the ceasefire was announced, telling you clearly that the market does not believe this pause will last.
By Friday, the situation had grown more complicated still. Fighting in Lebanon is already straining the truce, with Israeli operations in the south threatening to pull additional parties back into the conflict. The U.S. is now racing to stop Israel from taking actions that could collapse the ceasefire before talks even get started. Iran’s nuclear enrichment program remains one of the hardest issues to resolve, and the U.S. is still reportedly weighing military options to deal with Iran’s nuclear materials if diplomacy fails. Trump has also shifted to a much friendlier posture toward China ahead of a planned visit to Beijing next month, which some analysts read as Washington looking for Chinese help pressuring Iran through back channels. In return, Xi Xingxing also offered the US a helping hand to intervene with stopping the war in Iran. Both China and the US seem to be understanding that they will need to work together to stop the conflict. And both countries’ economies are dependent on the Straight being reopened.
On the economic front, the March inflation report printed at 3.3%, up sharply from 2.4% in February, with the increase largely driven by a 10.9% surge in energy prices. The big energy price spikes really began taking hold in April, so the damage is not yet fully visible in the data. I am calling for a 4% or higher print in April, and if this war continues, inflation will keep climbing toward 5-6% as the global shortage of energy drives up the cost of nearly everything we buy. A potential for stagflation or a mild recession continues to remain on the table.
The Chicago spot market diesel prices moved higher again this week as refinery maintenance put additional pressure on local supplies. Marathon and Phillips 66 are running a bit behind schedule, which is pulling surplus diesel barrels out of the market at exactly the wrong time. Farming season is approaching fast, and demand for diesel will skyrocket in the coming weeks. If diesel is not flowing at full capacity our of Chicago refineries when that demand hits, the Chicago spot diesel market could get pinched hard. Gasoline prices finished the week lower, however with the wild volatility retail prices will be all over the map. There is also a meaningful incentive right now to move gasoline and diesel barrels south for export given the global price arbitrage, which further tightens local supply. If crude oil prices hold at current levels, we could see some modest diesel relief in May, but for now retail gasoline prices will remain near current levels and diesel retail prices will hover near $5 per gallon. I do not see meaningful relief at the pump in the near future.
Propane had an interesting week. Production hit a record level above 3M barrels per day, and exports hit a record 2.4M barrels per day, yet the EIA reported only a 600k barrel increase in inventories which is a much smaller build than recent weeks. Propane inventories remain 71% above the five-year average for this time of year, one of the strongest inventory positions in history. Many in the market are beginning to believe that rising export capacity will start to eat away at the large surplus over the coming months. Propane future prices fell with crude on Wednesday when the ceasefire was announced but firmed back up quickly. I can see retail prices coming down a little heading into summer for the summer-fill season. Propane continues to be by far the least inflationary energy product, and I expect next season’s higher contracts to be only a little higher in prices compared to last 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
