Energy Markets Are Racing Higher Wednesday With Refined Products Up More Than 6 Cents/Gallon After Touching 8-Week Lows

Energy markets are racing higher Wednesday with refined products up more than 6 cents/gallon after touching 8-week lows during heavy selling Tuesday. The dramatic about-face comes after a Hamas leader was assassinated in Tehran early this morning, leading Iranian officials to pledge retaliation against Israel.

Even though the impact of the widespread fighting in the Middle East has been minimal for energy supply, anytime Iran starts making threats it’s impossible to think of their historical threats to disrupt traffic through the Strait of Hormuz which sees nearly 20% of all oil moving around the world. As a reminder, we saw refined product prices reach their highs for the year back in April after Israel killed two Iranian generals in Syria, only to see prices begin their seasonal slide after Iran’s retaliatory attack was relatively restrained.

So far, today’s big rally has only managed to pull prices back from the edge of a technical slide to the June lows, and hasn’t yet broken the downward trend lines that have pushed refined products down by more than 25 cents since the 4th of July.

Today is the last trading day for August RBOB and ULSD futures so be sure to look to the September contracts (RBU and HOU) for price direction if your local cash market hasn’t already made the switch. As an example of the expiration-induced price distortions, this morning the August ULSD contract didn’t trade for nearly 3 hours, so those prices were showing only 3 cent gains vs nearly 7 cent gains for September until a bid was finally hit.

The API reported more inventory draws last week with crude oil stocks down 4.5 million barrels, gasoline inventories down 1.9 million and distillate stocks down 322,000 barrels. The DOE’s weekly report is due out at its normal time today, which will give us another look at the real impact on production of the various refinery upsets reported over the past week.

Cenovus reported it had shut a unit at its 183mb/day Lima Ohio refinery Tuesday after an un-specified operational upset that ENT reports was a break in a cooling water line. So far the region has handled the extended shutdown of Exxon’s Joliet refinery relatively well, with minimal supply shortages, thanks in large part to an excess of refining capacity in Ohio. While Ohio refinery issues don’t typically move the needle for Chicago spot markets, local terminals now face their 2nd major upset in 2 weeks.

The storm system moving along the eastern edge of the Caribbean is still given 60% odds of being named in the next 7 days with impacts expected in parts of Florida by the weekend before moving up the east coast. Whether or not this weather event gets a name, at this point it looks like more of a threat to fuel demand than supply as heavy rains are expected in several major metro areas.

The EIA this morning highlighted the drop in California’s Cap & Trade carbon allowance prices which have reached their lowest levels in over a year this week as uncertainty over changes to the programs in both California and Washington persist and the influx of new renewables reduces demand for the credits. In other government-manufactured-credit news, RIN values have dropped 10% this week following a federal court rejecting the EPA’s denial of numerous small refinery waiver requests. D4 and D6 credits are both hovering near the $.60/RIN mark after trading north of $.67 last week.