European refined product markets snapped higher on June 13 as an escalating conflict between Israel and Iran triggered renewed panic over risks to energy infrastructure and saw traders rush to cover their short positions.
Israel’s major overnight offensive on Iranian nuclear sites sent markets into overdrive as markets have been forced to rethink risks of Iranian crude supply shocks, or, in a worst-case scenario, disruption to the critical oil artery through the Strait of Hormuz.
Israel has reportedly issued Iran with an ultimatum to reach a nuclear agreement by June 15, the UK’s Maritime Trade Operations office reported, while US President Donald Trump has warned of “much worse to come”.
Waking up to the news, one naphtha trader described “absolute panic” after crude made its largest single-day jump in five years, while trade desks have braced for days more volatility.
“We are scrambling around between risk position, P/L management, implications in the US, Asia, gasoil, jet, everything is connected together,” said a second trade source.
July ICE Low sulfur gasoil futures — the European distillates benchmark – spiked to around $687/mt at 11:35 GMT, while prompt time spreads jumped from $4.25/mt June 12 to around $7/mt, signaling stronger expectations of near-term tightness.
Crack spreads proved less reactive, particularly for gasoline, but the news triggered jitters across the barrel ahead of what should be peak seasonal Middle Eastern power demand and summer travel season.
“The reaction has been bigger at the front end of the curve,” said Arne Lohmann Rasmussen, chief analyst at Global Risk Management, discussing recent strength in the ICE LSGO complex. “If it happens in the near future, the impact is significant,” he said.
The timing of the attacks has also encouraged short-covering before markets close for the weekend, Rasmussen said, underscoring uncertainty around the coming days.
Infrastructure at risk
Markets are reassessing the risk of supply shut-ins after Israel launched a major offensive on Iran overnight, triggering a retaliatory drone strike and threats of more to come.
A second wave of Israeli airstrikes in Shiraz, Kermanshah and Tabriz has so far avoided energy infrastructure, but some 2.2 million b/d of Iranian refining facilities could still be targeted, analysts have warned.
According to the latest Platts OPEC Survey from S&P Global Commodity Insights, Iran pumped 3.24 million b/d of crude oil in May, which it supplies almost exclusively to Chinese refiners.
According to figures from JP Morgan, Iran has recently exported roughly 350,000 b/d of the refined product it produces, mostly from its Kharg Island terminal on the Persian Gulf.
China is also a major LPG offtaker for Iran, which in May exported a record 1.16 million mt of propane and butane, according to S&P Global Commodities at Sea data.
In a worst-case scenario, Iran could also target shipping through the critical Strait of Hormuz, responsible for 30% of global crude and products trade.
Focus on crude, shipping
As analysts respond to rising tensions, concerns remain mostly concentrated around physical risks to Iran’s heavy crude supply at a time when sour grades remain comparatively tight.
As a significant heavy crude producer, any hit to Iran’s oil pipelines or export capacities could tighten availability of its higher distillate-yielding crude typically run in Chinese refineries, with upside risk for global benchmarks.
Lower sour crude availability could trim high-sulfur fuel oil supply for the marine fuel market and power generation demand ahead of peak demand season. Additionally, the uptick in bunker fuel prices is putting additional pressure on freight rates, which are already facing upward pressure from rising insurance premiums.
“You may see higher crude prices, more volatile shipping costs for clean tankers having some indirect effect on product markets,” said Seth Clare, an oil analyst at S&P Global Commodity Insights.
An escalating security situation could also have a chilling effect on demand as airlines have cleared the airspace over Israel, Iran, Iraq and Jordan, and major Israeli airports have closed.
Iran has typically met most of its jet demand with domestic refinery production, but has traditionally been a large consumer of diesel and gasoil for road use and power generation.
Cautious optimism for Strait of Hormuz
For now, most speculators have stayed hopeful that the region can avoid a closure of the Strait of Hormuz, which handles most exports from the Gulf States.
“All of KPC and ADNOC would be shut in,” said one jet fuel trader. All hell would break loose,” he said.
In a June 13 note, JP Morgan analysts said the risk of Iran shutting off the Strait was “very low”, noting its previous aversion to closing the waterway.
In the 1980s, Iran and Iraq previously targeted 259 merchant vessels in the Persian Gulf and Strait of Hormuz, but Gulf oil exports stayed resilient, partly due to the availability of overland pipelines, the note said.
However, Iran’s economic interests could make new agitation in the strait unlikely, threatening relations with China, its main trade partner, and regional neighbors.
“The real “nuclear option” may not be “nuclear” but oil, and neither side appears eager to cross that line. The coming days will be critical,” said Ben Hoff, Head of Commodity Research at Societe Generale.
Source: Platts