Signal Brief: Iran Update: 9th Mar 0900 CET – Tail risks becoming reality

Cross-Barrel Signal Brief: Iran Update: 9th Mar 0900 CET – Tail risks becoming reality

– With very little to point to in the way of price-dampening news over the weekend, the reality of a second week of Strait of Hormuz (SoH) closure is hitting the market. Also equities, bonds, etc are pricing to reflect the impact of higher-for-longer crude prices.

– Unlike last week, when crude flat price saw an initially muted reaction, production shut-ins across Iraq and Kuwait (as well as rumoured imminent production losses in Saudi and UAE) are providing tangible justification for flat prices to rise as global crude balances tighten enormously and the scramble to provide Asian refineries with even minimum levels of crude to operate becomes more real. The time has come to talk about SPR releases as a buffer to the most extreme scenarios, even if they cannot fully compensate for a shut SoH.

– Headlines this AM that the G7 would meet to investigate releases were welcomed but again the price impact is likely to be short-lived, not least because the actual KBD draw rates possible on emergency reserves globally are still likely to fall far short of the actual missing KBD problem from SoH.

– Headline refining margins are unlikely to make much sense today, with the market struggling to discover at what levels products need to price to meet the demand of the most critical parts of the market. So far we have seen a relatively muted price response down the curve, with May cracks rising just enough to cover higher freight/increased cost to deliver crude. The upside to cracks in the short-term may be extravagant. Demand destruction via price will have to join demand rationing if this drags on.

– As flat price is starting to price a longer disruption, and genuine crude supply scarcity in the East, product markets will also now reasonably need to start pricing those same assumptions. We’ve already seen China, Vietnam, and others talk of refined product export curbs, but the reality is that if refineries are running low on crude, those products may simply not be available in the first place. Existing shorts will get worse, both in Asia and in Europe, and nowhere is that seen now more clearly currently than the jet E/W.

– April jet E/W has been swinging violently between pointing available jet barrels East vs West. Depending on which markets are currently open to react most quickly, the jet E/W has swung from around +70 to -150 through the 2nd half of last week, and now currently sits slightly positive again as the East returned to desks this morning to the genuine prospect of missing imported and local jet supply in the weeks ahead.

– This tug-of-war is currently attempting to determine the directional flow of Indian exports, but this ~150kbd of flow remains a drop in the ocean compared to overall lost jet/kero supply in the event the Straits don’t re-open within the next week or two. The market may need to starve certain markets in the short-term, as well as squeezing every drop of marginal flow out of places like the USGC.

For deeper market intelligence, daily commentaries, and expert insight, access Sparta Knowledge with a free 30-day trial: https://signup.sparta.app/