Happy Thursday!
I am writing my weekly update one day early as I will be out of town tomorrow. Considering the current volatility of the crude oil markets at the moment, by end of day tomorrow, the following update could already be out of date! I hope everyone has a great rest of their week!
Energy markets continued their dramatic run this week as the war in Iran escalated in new and significant directions, with oil infrastructure now emerging as a primary target on all sides of the conflict. Crude oil is set to close the week back in the upper $90s, with WTI holding near $100 per barrel — a level that will keep gasoline and diesel prices elevated in the marketplace for quite some time. The most significant development this week was a dramatic shift in the nature of the conflict itself. Rather than focusing exclusively on military and shipping targets, both sides are now actively striking energy infrastructure. Israel took out refining capacity inside Iran early in the week, which triggered an Iranian response that struck Qatar’s LNG production facility on Thursday, knocking out 17 percent of capacity for at least five years. The loss is staggering. Qatar is the world’s largest LNG supplier, and Europe and Asia rely heavily on that supply with little room to absorb a disruption of this magnitude. The attack marks a dangerous new chapter in the war, with many analysts now speculating that energy infrastructure will become the primary battlefield moving forward.
Iran escalated further by launching missiles at the capital of Saudi Arabia and striking a Saudi refinery, ratcheting up pressure on the Kingdom to keep production running at maximum capacity. A simultaneous attack on a Kuwait refinery failed to inflict damage, but the message was clear — no regional energy infrastructure is off limits. Iran also resumed bombing the UAE, targeting the Fujairah port, which forced the suspension of all operations at the Shah gas field again. The escalation raises serious concerns that the Strait of Hormuz will remain closed longer than most had anticipated. Over the past weekend, Iran also attacked Dubai’s international airport with a drone strike, one of the busiest airports in the world and the main travel artery connecting the West to the Gulf. Many believe Iran will continue targeting Dubai as a symbolic pressure point.
On the military front, Israel’s Defense Minister claimed this week that Israel killed Iran’s security chief and the head of the Basij militia. On Wednesday, Israel also took out Iran’s Intelligence Minister, and Israel started striking Iranian energy infrastructure, hitting oil and gas plants that supply Iran domestically and export to Turkey. Iran responded by attacking Tel Aviv with cluster bombs, causing widespread damage across portions of the city. Israel has signaled it intends to continue pounding Iran with airstrikes for at least another three weeks, believing significant ballistic missile stockpiles, nuclear facilities, and internal security infrastructure remain intact. Meanwhile, the Ayatollah has ruled out any ceasefire proposals and is reportedly threatening citizens with death if they attempt to coordinate an uprising against his leadership.
On the diplomatic front, Trump is reaching out to China to help negotiate a plan to reopen the Strait, though China has condemned the strikes on Iran and remains well stocked on crude, making meaningful cooperation unlikely. Trump is also scheduled to meet with Xi Jinping for an economic summit, but has now postponed the summit by at least three weeks while he focuses on reopening the Straight. Although China is well stocked with crude oil and can weather the supply disruption for quite sometime, China is the number one purchaser of Iranian crude and will eventually need the Straight to reopen. Some are starting to believe Trump is using the postponement as leverage to force China’s hand in helping to reopen the Straight. Trump additionally threatened to take out Iranian oil infrastructure on Kharg Island, the largest oil exporting terminal in Iran if Iran continues to attack its neighbors, and demanded other countries send ships to the Gulf to force the Strait open. The U.S. is also considering deploying ground troops to Kharg Island, though the move carries significant risk and no one knows whether Iran would strike its own territory to target American soldiers.
Despite the ongoing conflict, some supply relief is slowly emerging. Saudi Arabia restarted its largest refinery this week after a drone strike took it offline on March 2nd, restoring 550,000 barrels per day of capacity. Iraq also resumed pipeline exports to Turkey, adding 250,000 barrels per day, though that remains a small fraction of the roughly 3 million barrels per day Iraq had previously cut. Saudi Arabia continues to ramp up shipments through its Red Sea export terminal at Yanbu, which can move up to 7 million barrels per day via pipeline, with 5 million available for export and 2 million feeding domestic refineries. Seventy tankers are expected to load this month with another forty on the way, the majority heading to Asia with China taking approximately 2.2 million barrels of the 5 million exported. The UAE also successfully restored operations at its main oil loading terminal over the past weekend, recovering roughly 1 million barrels per day, or about 1 percent of global supply. A Pakistani tanker successfully transited the Strait this week, expanding the short list of countries that have managed to pass through since the closure began. However, overall shipping activity remains extremely limited. Fuel oil, often overlooked in normal market conditions, is quietly becoming a concern as inventories begin to deplete globally. Fuel oil powers the maritime shipping industry, and as the Strait closure drags on, tightening fuel oil supply could send shipping costs even higher, creating a compounding effect on the cost of crude, gasoline, and diesel.
On the policy side, Trump issued a 60-day waiver on the Jones Act, allowing energy companies to move products more efficiently between U.S. ports without the restriction of requiring U.S.-flagged and U.S.-manufactured vessels. The waiver has been used before in times of crisis and should help ease domestic distribution. The administration is also considering waiving summer RVP requirements for gasoline production in an effort to reduce prices at the pump, though the impact would be minimal relative to the scale of the current disruption.
The IEA confirmed this week that its historic 400-million-barrel reserve release — the largest in history — will begin toward the end of March. However, the announcement is already priced into the market, and any hiccups in distribution could send crude prices shooting well past $100 per barrel quickly. Russia sent a tanker of crude oil to Cuba this week, testing the Trump administration, which has stated no oil is to enter the country. With Russian oil sanctions temporarily lifted, how the U.S. chooses to respond will be worth watching closely. The EIA reported another large build in crude oil inventories this week, which kept some lid on prices. However, the government has warned that if the conflict extends well into June, U.S. crude inventories could move into deficit after spending much of last year above the ten-year average. The Federal Reserve held rates steady this week, citing rising inflation driven by higher oil prices and an increase in wholesale goods prices in February. A stronger dollar is also helping keep WTI somewhat in check, as crude is traded in U.S. dollars.
Diesel remains the most acute problem in the domestic market. Heavier crude oils, which are required to produce diesel, come primarily from outside the United States, and the global bid for those barrels is fierce right now. Venezuelan crude is helping at the margin, but the competition for limited heavy crude supply is driving up refining costs and pushing diesel prices higher. The national average for diesel topped $5 per gallon for only the second time in history this week. Gulf crude also became the most expensive oil in the world for the first time ever, a remarkable milestone that underscores how dramatically this conflict has reshaped global energy pricing.
The Chicago spot market experienced violent swings this week, with moves exceeding 40 cents in both directions. The most important detail to watch right now is the massive differential spread between Chicago spot prices and the NYMEX. Diesel is currently trading at roughly a 70-cent discount to the NYMEX contract in the Chicago market. When the prompt month contract expires and April demand picks up locally, there is a real possibility that Chicago diesel prices rocket higher to close that gap. Gasoline is trading at a discounted differential to the NYMEX, though softer April demand could keep a lid on any breakout to the upside. Both gasoline and diesel prices at the pump should continue moving higher in the near term.
Propane markets remain quiet as winter demand fades. The EIA reported a build in propane inventories this week, putting modest downward pressure on prices, and trading ranges have been very narrow. However, with refinery attacks continuing to take production offline globally, propane deserves a closer look. If export demand accelerates as a result of tightening global supply, propane could quickly become a premium commodity in the open market, pushing prices higher for U.S. consumers even during a period of seasonally low demand. We are watching this closely going into the summer-fill season.
As always, if you have any questions please feel free to give us a call. Have a great rest of your week and weekend!
Best regards,
Jon Crawford
Sources: Bloomberg, Reuters, Wall Street Journal
