The Energy Report: Strait Talk

The United States hits Iran’s nuclear facilities conducting air strikes on Fordo, Natanz and the Isfahan sites without any opposition or return fire from Iran. After the bomb mission, Iran is now threatening to close the Strait of Hormuz.

In fact, Iran’s parliament officially approved the closing of the Strait of Hormuz for the first time since 1972.

But let’s be straight here, Iran doesn’t have the ability militarily to cut the Strait of Hormuz for any extended period and if they do, it would be economic and political suicide.

Ships avoiding the Strait of Hormuz are facing higher shipping and insurance costs. Some ship owners are steering clear of Iranian waters by staying closer to Oman and the UAE or halting Middle East bookings. Reports indicate that tanker rates for very large crude carriers have surged due to perceived risks.

For example, Mideast Gulf tanker rates to China increased by 24% in the days leading up to the conflict. Additionally, crude carrier rates from the Persian Gulf to Japan reached $55,000 a day, the highest in over a year. The cost to charter a very large crude carrier from the Gulf to China jumped from $19,998 to $47,609 shortly after the Israeli attack.

The reality is the risk of a complete shutdown of the Strait is significantly lower than it was a decade ago. The countries in the region have taken measures to mitigate this threat, leading me to believe that Iran would derive minimal military or economic benefit from such an action.

After the expected pop and drop in price, the Oil prices has filled the opening gap after a sharply higher opening and now we are going to wait around to see how Iran responds.

Reports indicate that Israeli fighter jets are still conducting strikes on military targets in Tehran and western Iran. An Israeli military spokesman today said the Iranian threat has not been eliminated.

President Trump warned Iran against retaliation. This comes days before President Trump was told by Iran that they had sleeper cells in the United States that are ready to strike at a moment’s notice.

Overnight, oil prices that increased by 3% and then fell to fill the opening gap and trade lower, rebounded due to reports of an American military base in Syria being attacked which has not been confirmed.

The current muted reaction in the oil market is due to the United States and Israel being selective on their targets. The US targeted Iran’s nuclear sites rather than their energy export capabilities.

Iran faces a decision; if they retaliate in a manner that prompts further action from Israel or the United States, their ability to fund their economy through oil exports may be significantly affected. The Trump administration prefers stable oil prices but acknowledges that OPEC has sufficient spare capacity to compensate for any loss of Iranian oil. This scenario could benefit American oil producers if they increase production to cover the potential deficit of Iranian crude.

As I continue to mention, it is the diesel spread and diesel prices that have seen the most volatility and are able to continue to lead the way up and down. There is a growing concern about the tightness of diesel and this disruption makes that risk even greater.

So, if you like the market action last week on oil and products, you are going to love the market action this week.

For oil prices we are going to be headline driven. But I think most people now know that the talk of $50.00 a barrel oil is probably off the table for the foreseeable future.

The oil market has been knocked out of its complacency and even though it might give up some of the impressive gains that we’ve seen after these attacks, the likelihood of oil prices getting back to the lows of where they were just before the Israeli attacks is probably very unlikely.

The same applies to gasoline and diesel. Diesel will remain the dominant force in this sector due to the undeniable global supply deficit.

Natural gas prices are rising due to geopolitical risks and hot temperatures across the country. While wet crops benefit, many question the rapid shift from winter to summer. Long-term fundamentals for natural gas seem positive.

Fox Weather warns of life-threatening heat as a dome prompts alerts for 147 million Americans across 28 states with record highs. Major cities along the I-95 corridor, such as Washington, Philadelphia, and New York City, are nearing 100 degrees in the first major heat wave of the summer.

EBW Analytics notes that late June heat spurred a rally in natural gas, with NYMEX front-month hitting $4.148 on Friday, up 64.9¢ (+19%) week-over-week. However, prices gave back nearly half of the gains by Friday’s close. Strong heat, Sabine Pass LNG’s return from maintenance, and falling injections support prices. Yet, Henry Hub spot prices at $3.10 this weekend still weigh bearishly heading into the volatile monthly rollover period.