The conflict in the Strait of Hormuz has disrupted the complex global refining market, which is a recurring theme we’ve been tracking in our Market on Close livestreams. It’s been a recurring theme in my own portfolio, as well.
The main commodity affected is diesel, aka ULSD NY harbor distillate (HOV26).
US refiners are benefiting from both tight global supplies and access to relatively cheap crude oil, in the form of Canadian tar sands and Venezuelan heavy crude. This has blown out the crack spread, which is the difference between the price of a barrel of refined product and a barrel of crude. This translates into huge margins for the refiners.
“Increasingly tight product markets pushed Atlantic Basin refining margins to all-time highs in July as diesel, jet fuel and gasoline cracks surged amid seasonally higher demand, supply shortfalls and depleted stocks,” according to the International Energy Agency (IEA) oil market report for August. “Despite a monthly increase of 1.8 mb/d, global refinery crude throughputs in July remained nearly 5 mb/d below year-earlier levels, with capacity elsewhere in the system currently unable to offset product supply bottlenecks.”
"The situation is not going away anytime soon and could very well get more expensive," wrote Mizuho Securities analyst Robert Yawger in a recent note. "Unless there are big breakthroughs in the peace process around both conflicts, large amounts of diesel will remain shut in."
Meanwhile, US refiners are running at full capacity of around 96%, and making hay while the sun shines.
The caveat is that these are old behemoths of infrastructure – there hasn't been a new refiner built in the US since the late ‘70s – and they require constant, seasonal maintenance, which is overdue as we head into the high-demand heating oil season.
This is a classic supply-and-demand story that won't go away with improvements in the Gulf. The VanEck Vectors Oil Refiners ETF (CRAK) looks to have broken out of consolidation and is poised to continue, which I believe is a long-term bullish narrative.
– John Rowland, CMT, is Barchart’s Senior Market Strategist and host of Market on Close.
