Be Prepared!
With two battle fronts and diesel set to get ugly!
In this report: Houthis attacking Yanbu. A muscat proposed joint mechanism with Tehran to oversee the strait.
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We can take it that the blunt force we have seen from The Houthis have served as a strong warning shot across the US bow. The threat is a most real and present danger to the energy markets. Despite this, price remains contained. So, with initial sparring subdued, talks between Tehran and Washington are continuing in earnest, brokered by Pakistan. Further ‘kinetic events’ and thus short to medium term supply shocks can not be ruled out. With front month prices the nerve ending for this, loadings and transits to and from Yanbu are subject to Houthi attack at any time. The Saudi Petroline (East-West pipeline) can deliver 7mb/d to this port, but Yanbu can only load about 4.5mb/d, with loadings as of July 13th reaching an all-time high of 4.7mb/d.
So we see a picture where, despite now 2 straits going hot, the cap on price is the safety net of the IEA strategic release and the headlines that talks are ongoing. The bulls had a great go at price over the last 3 weeks, and they continue to rule the roost.
The bears are holding on to 3 pillars, 1 is gone, 1 is dwindling and the other is never going to happen. 1. dwindling-The strategic releases are scheduled to grow sharply smaller through August, with 110mb left of strategic reserves. 2. Never going to happen- The last couple of months, despite a lot of effort from all sides, have not yielded any middle ground on talks. A return to talks will be hobbled by the issues of the MOU. 3. Read on below in the China section.
Colliding conflicts
We now get to connect the powers involved on both sides of the two major war fronts happening around the globe. The US, Europe and Israel represent the western axis. Russia, Iran and Yemen represent the eastern axis, with China no doubt to be added soon. On Saturday 26 July, Ukraine struck the Iranian-flagged cargo ship Ana in the Caspian Sea with a long-range drone. One crewman was killed. Zelenskyy said the vessel was moving drones and missiles from Iran to Russia. Iran called it commercial shipping and summoned Ukraine’s chief of mission. Two wars that were being fought separately are now being fought over the same supply line. I think this will serve as the first of many. In my personal opinion, this is a war that will move to global conflict status within 12 months.
Tight
There is a tightness stalking the US crude picture. Refiners are running now at 97.2% efficiency, up from 96% prior. With margins as fat as they are around 70 bucks from a normalised range of about $20 to $30. The latest EIA report flagged a couple of points of evidence. Commercial crude was a 7.17mb draw with Cushing also drawing 4% further. The EIA adjustment reading of residual oil also took a sharp pullback- more in the EIA report here
At the pump
As I have discussed over the last 2 weeks, the concern is now shifting away from front month prices towards refining. Prices are now inflecting back towards the highs seen at the start of this conflict in March/April. We must watch this space, as governments across the world have largely thought that they dealt with this already. I would be concerned that they may not have thought this would need a second bandage. Will we see new highs across Diesel and Petrol? I think we will, and it will come right into harvest time. Despite The US producing higher rates of Diesel, it may not be enough given how decimated the global refinery picture is currently.
Oh, and there is also this
(China section, The COT deep analysis and Trade section)
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