The market is on the verge of another upside breakout as the diesel crack spread is cracking up, hitting the highest level since 2023 on supply tightness as the Israel-Iran conflict rages. Markets are urging refiners to increase diesel supply as geopolitical risks in the Strait of Hormuz have driven up Mideast tanker rates by 40% since June 13. Rates in other regions are also rising due to Mideast tensions, with ship navigation systems in the Gulf facing significant interference.
The market also believes that Iran plays a critical role in supplying diesel fuel because of the quality of their oil, and this comes at a time when non-jet distillate inventories are at historically low levels. Also, the demand for diesel is strong for power generation in regions like Egypt, which has shifted to diesel among shortages. Because of the green energy movement, we have closed a lot of diesel refining capacity. Now that Iranian refineries have been damaged and reduced exports from the Middle East, it can’t be offset quickly by other producers.
The market is laughing and cracking up with President Trump over Fed Chairman Jerome Powell’s hawkishness as he searches for the ghost of inflation because of tariffs, but that is merely a mirage. Trump was right when he predicted the outcome, saying, “So we have a stupid person. Frankly, you probably won’t cut today,” Trump said in impromptu remarks just outside the White House. “Europe had 10 cuts, and we had none. And I guess he’s a political guy, I don’t know. He’s a political guy who’s not a smart person, but he’s costing the country a fortune.”
The geopolitical risk, though, is still at risk as the Israeli military hit Natanz, Isfahan, and Arak nuclear sites in Iran overnight. Iran is desperately reaching out to President Donald Trump to get back to the negotiation table. The Wall Street Journal reported that President Trump approved attack plans for Iran but delayed implementation to see if Tehran would abandon its nuclear program, according to sources.
According to The Journal, Israel and Iran continued their conflict into the seventh day. An Iranian missile hit an Israeli hospital, while Israel targeted 100 sites in Iran, including a reactor in Arak and a facility in Natanz. When asked about striking Iran’s nuclear facilities, Trump said, “I may do it, I may not do it,” and reiterated his demand for Iran’s unconditional surrender: “The next week is going to be very big, maybe less than a week.”
The New York Post reported that, “President Trump encouraged Israeli Prime Minister Benjamin Netanyahu to continue airstrikes on Iran Wednesday after issuing a final warning to the regime in Tehran that it was late to restart nuclear talks but then again? Trump repeated his demand for “unconditional surrender” by Iran without confirming any attack plans were in the works, wishing Supreme Leader Ayatollah Khamenei “good luck” and pronouncing him “totally defenseless” as Israel dominates Iran’s airspace after six days of attacks. “Very simple — unconditional surrender”.
The Jerusalem Post reported that Iran’s Mission to the UN refuted US President Donald Trump’s statement that Tehran has suggested coming to the White House for negotiations regarding the ongoing conflict with Israel. “No Iranian official has ever asked to grovel at the gates of the White House. The only thing more despicable than his lies is his cowardly threat to ‘take out’ Iran’s Supreme Leader, Ayatollah Ali Khamenei, the Iranian mission says. “Iran does NOT negotiate under duress, shall NOT accept peace under duress, and certainly NOT with a has-been warmonger clinging to relevance,” it adds.
After Iran hit a hospital, Israel’s Defense Minister: Iran’s Khamenei ‘Can No Longer Be Allowed to Exist’. When asked if the Saudis could raise output, the Saudi Energy Minister says they respond to actual situations when asked if Russia and Saudi Arabia would replace lost Iranian oil supplies.
The current activity in the oil market is one of the most notable observed in over a year. Breaks in the oil market are consistently being bought, and prices are above critical moving averages, reflecting tight supply and demand dynamics during a period of rising geopolitical risk. As a result, it is advisable to stay hedged.
Option premiums have more than doubled as risk continues to increase, but this also presents opportunities for swing trades and combination trades in oil and gas. The crack spread on diesel appears very elevated, while the gasoline crack spread is strong but somewhat less. The market’s focus on diesel remains a major concern for the global market due to the limited refining capacity, which will not be easily resolved.
Natural gas prices are getting a combination of geopolitical risk premium buying as well as hot temperature buying as the front month poked through $400 overnight. The U.S. Energy Information Administration reported that developers plan to add 18.7 gigawatts of combined-cycle capacity by 2028, with 4.3 GW currently under construction.
Yet in the short-term Fox Weather is warning that New York City, Philadelphia are set to flirt with 100 degrees as a potentially dangerous heat wave grips I-95 corridor. They say that new natural gas capacity additions were minimal last year, as only one industrial sector combined-cycle gas turbine power generator came online. High temperatures are expected to surge 10-20 degrees above average for a large chunk of the country. While few observation sites will see the actual air temperature reach 100 degrees, the heat index is expected to reach 100 due to high humidity levels. So, natural gas could follow diesel in an upward price spike.