ICE Brent has now settled above $100/bbl for four consecutive days. With no sign of de-escalation in the Middle East, the market continues to consolidate above this key level. Oil flows remain largely constrained, despite hopes that Iran might allow additional tankers to move through the Strait of Hormuz to select countries. However, if Iran’s plan is to inflict pain through higher energy prices, the number of tankers it allows through the Strait of Hormuz may be very limited.
Confirmation of the death of Iran’s security chief, Ali Larijani, only increases uncertainty for markets. It’s unlikely to lead to de-escalation.
Energy infrastructure across the Persian Gulf continues to be targeted by Iran, with the UAE’s Fujairah port being targeted multiple times. Meanwhile, upstream production continues to decline as producers try to manage storage constraints. There are reports that the UAE and Kuwait oil cuts are now as much as 1.5m b/d and 1.3m b/d, respectively. This is on top of roughly 2.9m b/d and 2-2.5m b/d of reported supply cuts from Iraq and Saudi Arabia.
The refined product market continues to trade at extremely elevated levels amid disruptions in crude oil and refined products. The ICE gasoil crack has moved above $45/bbl. This highlights concerns in the middle distillate market. The move has been even more extreme in the jet fuel market with the jet regrade trading above $400/t. The European jet fuel market is heavily exposed to Persian Gulf supplies; around half of European imports come from the region. In addition, around 23% of the global seaborne jet fuel trade moves through the Strait of Hormuz.
Asia is more exposed to naphtha flows in refined products, which helps explain why the naphtha crack in the region has moved from its usual discount to a premium. Ethylene margins are also deeply negative due to the recent rise in feedstock prices. This should prompt crackers to reduce operating rates.
The only way we’ll see refined product cracks normalise is with a resumption of crude oil and refined product flows through the Strait of Hormuz. Until then, markets will continue to tighten as refiners are forced to reduce operating rates amid feedstock shortages.