Four weeks ago, US President Donald Trump stated that the US risked running out of oil in four weeks as the reason for the MOU with Iran risking ‘bedlam’.
The problem is, in ideal conditions it takes six weeks for a crude tanker to reach the US Gulf Coast from the Persian Gulf after which point the complex process of crack refining and distribution has to begin.
This Substack covered the fact that the US Strategic Petroleum Reserve (SPR) is now effectively right at its operational limits for further draw-down after which point the storage caverns where the oil is kept are damaged. For the past two weeks, SPR draws have declined to 6 million (M) barrels (bbl) /week from 8-10Mbbl /week over the prior two months.
In addition, inventories of petroleum derived fuels have globally been drawn-down as the Iran War has progressed.
Inventories of fuel are dispersed and uneven and as inventories are drawn-down and thinned, some areas will be starved of supply first. This starts the spiking price signal as supply is bid to relieve shortage as is happening now in many places on a global basis.
The world, including the US, is indicating it is becoming starved of some fuels starting with diesel. Refineries simply cannot currently produce enough fuels to meet market demand after months of inventory buffer draw-downs and supply chain dysfunction.
Diesel supply in the US is currently in most acute shortage. A proxy for the market price of diesel is heating oil (HO) which is a middle distillate from oil refineries and virtually indistinguishable chemically from diesel.
On the CME COMEX / NYMEX exchange, the HO crack spread is the differential in price between heating oil and crude oil and is an indicator of the shortage of diesel relative to crude oil in the economy.
The crack spread for diesel is today blowing-out to $88.00 from $20 /bbl when the market is well supplied signaling onset of acute shortage.
The economy functions on diesel with 80% of all goods moving via diesel transportation.
Diesel supply is crucial and once supply chain shortages start, physical reverberations (called ‘lash’ or ‘bullwhip effects’) are very difficult to extinguish.
This is where we are now.
Figure 1 - Diesel Oil (HO) - WTI Crude Oil Crack Spread; source: Tradingview.com
Everything that is happening now was clearly visible before Iran was attacked and Trump was advised by the military Joint Chiefs not to do so.
Oil shortages and spiking energy and goods prices trigger spiking prices in the economy as well as rising interest rates.
The everything bubble in assets (equities, bonds, real estate, etc.) that has been created by 40 years of loose money policy by central banks is dependent upon low interest rates to continue.
Fuel shortages with spiking energy prices will drive much higher interest rates if they continue as discussed here: https://jensendavid.substack.com/p/the-die-is-cast-energy-and-financial
Yesterday, I discussed energy, markets, gold and silver with Elijah Johnson of Liberty & Finance:
Alternate link: https://rumble.com/v7covkg-everything-bubble-about-to-burst-were-weeks-away-david-jensen.html
YouTube:
Best regards,
David Jensen
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