Hormuz Shock Shows Up in Diesel, Not Crude
Jefferies analysts warn that the global oil crisis caused by the closed Strait of Hormuz is hitting the diesel and refined products market hardest, while US-Iran talks stall.
Jefferies analysts warn that the global oil crisis caused by the closed Strait of Hormuz is hitting the diesel and refined products market hardest, while US-Iran talks stall.
Brent crude held near its recent high of $90 a barrel on Thursday morning, then fell to around $87, as traders await progress on reopening the Strait of Hormuz. The standoff in US-Iran talks and increasingly tight global fuel supplies continue to support prices, with some leading energy experts warning of an impending supply shock, as reported by ZeroHedge.
Negotiations between Washington and Tehran remain stalled through the end of the week as the Trump administration maintains a blockade of Iranian ports, while Tehran seeks compensation for war damages. Pakistan, which has been acting as a mediator, said broader peace talks have stalled.
Late Wednesday, Trump wrote on Truth Social that the US has "total control" over the Strait of Hormuz, adding, "I think we will keep it." This is yet another confirmation that he has opted for economic siege warfare tactics while the US military campaign remains on hold.
On the prediction platform Polymarket, the odds of extending the 60-day US-Iran negotiation period currently stand at about 25 percent, down from 80 percent a week ago. Meanwhile, the odds against an extension are at 76 percent.
Brent crude is heading for a weekly gain of nearly 5 percent as a quick resolution to the US-Iran conflict remains uncertain, and attacks on energy infrastructure in Ukraine and Russia further tighten oil markets and, more critically, diesel.
Jefferies analyst Sam Burwell, who specializes in oil, gas, and energy infrastructure, wrote a note on Wednesday titled "Three Pictures Worth 1,900 Characters" highlighting extremes in the oil market. "Global oil market tightness is showing up in products, not crude, at least for now," Burwell said.
Chinese crude imports saw a massive drop of about 5 million barrels per day following the closure of the Strait of Hormuz, demonstrating the elasticity of Chinese demand. In July, there was a monthly increase of about 1 million barrels per day compared to June, but a return to the five-year average of 11 million barrels per day would imply additional demand of 3 million barrels per day.
Samantha Dart, co-head of global commodities research at Goldman Sachs, told Bloomberg TV early last week that the global diesel shortage "keeps her up at night." Saxo Markets strategist Charu Chanana said volatility will remain elevated until Hormuz reopens and production outlook becomes clearer.
The International Energy Agency (IEA) released a report on Wednesday forecasting a deficit of 1.8 million barrels per day in the current quarter, more than double its previous estimate. The agency also warns that elevated prices are beginning to curb demand and predicts the largest annual supply shortfall in five years.
In contrast, US crude inventories rose by 17.4 million barrels last week, the biggest increase since January 2023, as exports weakened and imports from Saudi Arabia and Venezuela increased. US refinery utilization, although down on a weekly basis, remains near seasonal highs of the past 20 years.
Clean product prices in 2008 were similar to today's on a nominal basis, Burwell notes. The Bank of America commodities team warns: "the diesel market appears poised to stay tight, volatile, and expensive well into next year."
