Energy Markets Pulling Back With Possibility Of U.S. And Iran Deal To Lift Sanctions On Oil Exports

Reversal Thursday is in effect, with refined product futures down 5-6 cents/gallon and RIN prices dropping 15 cents, after rallying for 3 straight days to start the week.

Suggestions that the U.S. and Iran are “sort of” close to a deal that would lift sanctions that limit Iran’s oil exports is getting credit for the pullback, even though statements from Iran’s President Wednesday suggested there’s still a long way to go to normalize relations. Perhaps even bigger than a potential deal with Iran is that the U.S. has now made a deal with the Houthi’s, relaxed sanctions on Syria and made numerous investment deals with Arab countries in the past 2 weeks, all of which suggests easing of multiple supply constraints, just in time for demand to slow down.

Speaking of which: The IEA lowered its global oil demand forecast in its latest monthly update, citing economic headwinds and record EV sales for the slower growth. The report suggests that even though the U.S. has made deals with the U.K. and China in the past week, there is plenty of trade uncertainty remaining that will act as a headwind to economic activity. The agency also noted why the actual OPEC & Friend’s production increases will be lower than the announced values due to several countries already cheating on the deal. That ramp up of OPEC production and slowing demand is bad news for U.S. oil producers, who are reducing their spending plans, causing the IEA to drop their predictions for U.S. output for a 2nd month in a row.

The IEA’s annual EV outlook highlighted growth in electric vehicle sales, with an estimate that nearly 1 in 4 new car sales globally this year will be some form of electric. The report also noted how EV sales in Europe have stalled following the end of incentive programs to boost their demand, and that changing policy in the U.S. will likely slow the trajectory of growth. China remains the engine globally of EV growth, producing nearly 70% of all EVs, with the key factor that most of its EV vehicles now cost less than their traditional counterparts whereas most other countries still require a premium to by electric for most cars.

RIN prices are taking another rollercoaster ride, reaching a fresh 20 month high Wednesday only to drop 15 cents from yesterday’s peak following congressional testimony from the EPA commissioner and reports that the EPA had sent a proposal to the White House on next year’s Renewable Volume Obligations. D6 ethanol RINs are seeing the most action, trading north of $1.14/RIN yesterday before falling to $.99 this morning, suggesting that the proposed levels for the RFS next year are lower than expected, and also perhaps ignoring that the fact that there will be an open comment period for the public to weigh in before the levels are finalized. Right on cue, prices have already bounced by 6 cents from the early morning panic selling as it would appear the reality of a proposal not being a final rule has sunk in.

Notes from the DOE’s weekly status report: See charts attached.

Reduced exports and increased PADD 5 stocks led to the build in crude last week. PADD 5 has seen multiple refinery issues contributing to the stockpile there despite a small increase in refinery runs last week. Runs were increased in PADDs 2-4 as well, keeping the total U.S. run rate above its 5-year range. Following a slight increase last month, PADD 4 capacity dipped below its 5-year range after having spent about a year unchanged.

The draw in diesel stocks drops overall levels under their 5-year range with PADD 1 looking very similar at the low end of its range. PADD 2 stocks started the year out hot but have fallen steadily over the past couple months to drop below the seasonal low set in 2023. The PADD 5 RD reading fell a bit but both traditional and renewable diesel combined are still holding above average levels for the time being thanks to a big surge in imports. In general, the tight distillate supplies seem to be driving recent strength in both time and crack spreads with front month backwardation now standing north of a nickel, and diesel cracks adding $5/barrel in the past week.

Gas inventories declined in all PADDs except 3; however, PADD 1A (New England) saw a little over 1mm barrel increase. The 2mm barrel increase in Gulf Coast stocks came off a 5-year seasonal low and are still running behind the previous two years. Gasoline demand estimates continue to hold near year ago levels.

Refinery runs increased last week, and are holding above their seasonal range, despite so many refinery issues being noted in recent weeks. PADD 2 facilities had a large build for a 2nd straight week and now appear poised to make a run at last summer’s record setting levels after extended spring Maintenance, while PADD 3 facilities continue on their record setting pace. PADD 5 rates increased on the week which suggests that either the news of a fire at Valero Benecia and upsets at at least 3 other CA refineries last week didn’t impact production, or something is off with the numbers.