Oil futures prices soared Friday on the back of Israel’s attack on Iran, but there were no indications any oil-related facilities had been impacted by the multi-pronged offensive by the Israeli military.
“Non-nuclear energy infrastructure has not been expressly threatened by any party thus far,” S&P Global Commodity Insights (SPGCI) (NYSE: SPGI) said in a “factbox” summary of key energy-related developments stemming from the Israeli attack.
Ultra low sulfur diesel (ULSD) on the CME commodity exchange settled at $2.3587/gallon, an increase of exactly 17 cts/g or 7.77%.
Friday’s ULSD settlement is the highest since February 27.
The one-day increase of 17 cts/g is the highest since Jan. 10. The last time ULSD increased as much as December 2022, when it rose more than 18 cts/g. But the gain that day was 5.97%; today’s was 7.77%.
The higher ULSD levels followed increases in global crude markets, which at first tend to rise or fall more in percentage terms than products like gasoline or diesel in reaction to real or potential disruptions in oil supply or demand. But that did not occur Friday, with ULSD rising more than the two key crude benchmarks in percentage terms.
Brent, the global crude benchmark, rose $4.87/barrel on the CME, an increase of 7.02% to settle at $74.23/b. West Texas Intermediate, the U.S. crude benchmark, climbed $4.94/b to $72.98/b. That marked a percentage gain of 7.26%.
What’s at stake through any widening of the war to include Iranian capacity to produce crude was spelled out by SPGCI in its factbox. The SPGCI segment, which houses the legacy Platts business, said Iran produced about 3.25 million b/d of crude in May.
Of the countries in the OPEC+ group of oil exporters, only Saudi Arabia, Russia and Iraq produced more. The U.S. is the world’s largest crude producer with output of about 13.24 million b/d, according to the latest report by the Energy Information Administration.
But since the Iranian Revolution in 1979 and the takeover by its Islamic leaders–and its breach with most other Arab oil producers–the nightmare scenario for oil consumers has always been that Iran would take steps to close the Strait of Hormuz, which is the entrance to the Persian Gulf. Some portion of oil exports from Saudi Arabia, Kuwait, the United Arab Emirates, Iraq and Iran all pass through the Strait of Hormuz.
But despite those fears that have now been in place for more than 45 years, a closure has never happened. Several analysts Friday said it was not likely to happen this time either.
The Strait of Hormuz is “obviously the major concern,” Paul Sankey of independent research firm Sankey Research said in an interview with CNBC. But he added that if Iran took steps to close the passage, “all hell will break loose. I’m sure Donald Trump is going to be at the forefront of that unleashing of hell.”
But Sankey was not fully downplaying the impact from the Israeli attacks. He said the “speed of the move we’ve seen is actually as fast as we saw during the Russian invasion of Ukraine. “
“Recently the oil market hasn’t been characterized by reacting to geopolitical risk as much as you would think,” he said. “On this occasion, we’re doing a Russia-Ukraine reaction. So you have to ask yourself, why is that?”
Sankey said if there is a loss of output from Iran, it will be difficult to turn to the U.S. Strategic Petroleum Reserve to fill the gap. Reserves were drawn down by the Biden administration to compensate for the loss–real and anticipated–of Russian oil following its invasion of Ukraine in 2022.
The other option to fill any gap, Sankey said, is spare capacity in several Middle East countries; Saudi Arabia, Kuwait, the United Arab Emirates and Iraq. But the problem with that spare capacity is that much of it is behind the Strait of Hormuz. “I think the market is pricing real fear about spare capacity,” Sankey said. “That’s why the move has been so aggressive.”
Richard Joswick, the head of near-term oil analysts at SPGCI, said “the key is whether oil exports will be affected.”
He noted that when Iran and Israel went back and forth with attacks last year, oil prices did move higher at first. The higher levels didn’t stick for long once it became clear that the attacks had no impact on supply.
But the SPGCI report also quoted J.P. Morgan analysts who said the “worst case-scenario” of lost output would be a decline of Iranian supplies of 2.1 million b/d. That could spike the price of dated Brent–the physical benchmark that is drawn from the market for several different crudes–to $120 to $130/b.
Retail prices take time to react to moves big and small in futures prices, though wholesale prices will be expected to move on the same day to reflect higher futures prices.
Pilot Flying J makes its retail pump prices available through a downloadable spreadsheet. As of 2 p.m. Friday, there was no indication of a surge in retail diesel prices as a result of the Israeli attack; any increases were small and of an amount that would be considered part of the normal day-to-day fluctuation.
That lack of movement is not surprising given that the attack just happened. When disruptions to physical supplies occur, like with a hurricane or pipeline outage, price spikes can be more rapid. That has not happened yet.
Patrick DeHaan, the head of petroleum analysis at GasBuddy, which tracks retail prices, said in a post on X that diesel could rise between 10-30 cts/g over the next two weeks.
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