European oil products rise further amid fresh Israel-Iran strikes

Oil product cracks and flat prices continued to edge higher across the barrel after continued escalation in the Israel-Iran conflict that has now made energy infrastructure a target for the first time.

Crude markets jumped by over $4/b to $74/b after a major Israeli airstrike on Iran on June 13 as analysts warned of the most significant escalation in the conflict in decades. After Iran's major export infrastructure emerged unscathed from a weekend of further attacks, Dated Brent futures were sharply lower again by 1400 GMT on June 16, dropping to $71/b.

However, oil products markets have been left reeling from attacks that have expanded in scope to hit domestic-oriented oil infrastructure, including Israel's Haifa refinery and the Shahran fuel storage depot in Iran.

As Israel's largest refinery, the Haifa complex has provided an important outlet for the domestic market and Mediterranean importers, though its owners said in a statement on June 15 that crude processing is ongoing at the site. Meanwhile, another 2.2 million b/d of Iranian refining infrastructure could be at risk of further strikes, analysts have warned.

As traders reassess risks of supply shut-ins for the sour crude produced in the Persian Gulf and refined product flows from the region, ICE Gasoil futures extended gains, while fuel oil cracks and LPG also strengthened. Distillate markets remain most exposed to regional disruption, keeping gasoiline benchmarks comparatively stable.

Distillates exposed

As key export hub for middle distillates, such as diesel, gasoil and jet fuel, supply shocks to the Gulf would have a substantial impact on European distillate markets at a time when inventories are already tight.

Iran's estimated 350,000 b/d of refined product exports flow mostly to China, according to JP Morgan figures, but attacks on nearby shipping could embroil flows from other Gulf States, including Saudi Arabia and Kuwait, and see freight rates spike.

In mid-afternoon European trade on June 16, the front-month July ICE LSGO futures contract rose $12.75/mt from the previous day's Platts assessment to $697mt, continuing the upward trajectory seen on Friday and hitting the highest level since February.

On Friday, front-month ICE LSGO futures contract surged $38.75/mt, the biggest daily gain since October 2022.

"The distillate market is the one where you could probably see the impact crack-wise", said Arne Lohmann Rasmussen, chief analyst at Global Risk Management.

On June 13, the Platts LS Gasoil front-month crack spread was up $1.48/b to $19.15/b, reflecting fears of near-term tightness, while the equivalent crack spread for jet fuel rose $2/b to $20.87/b.

The greatest blow to the market could be disruption to the Strait of Hormuz, which handles around 30% of the world's crude and products trade. Over the weekend, Iran issued a threat that it could strike shipping linked to countries that defend Israel, though analysts say few are ready to fully price in a major disruption.

"On Friday there was panic, the market was pricing in the risk of the Strait of Hormuz closure", Rasmussen said. "Things calmed down slightly today but it's probably still early days to conclude that prices can't move higher," he told Platts, seeing a 15-20% risk that the passage could be shut.

For the European distillate market, the impact of the closure would be massive given the already low stock levels amid a patchy US arbitrage and an acute lack of prompt oil.

"There is 1 million mt of diesel coming through those straits each month", said one European diesel trader. "I don't think there is sufficient diesel given that the tanks are pretty empty. I think that's why the front spread has moved up, reflecting the risk in the market".

LPG flows at risk

In the light ends complex, LPG markets have rallied as attention has turned to substantial trade flows from Iran and the wider Persian Gulf.

China - the world's biggest importer of LPG - is heavily reliant on Iranian butane, and drew record volumes in May as demand has surged. Meanwhile traders have warned that the wider Arab Gulf could be "irreplicable" for butane markets in the event of a supply shock.

Responding to new risk assessments and rising freight forecasts, Far East prices were strongly bid, and inter-month backwardation deepened on supply-side fears.

LPG flat prices in Northwest Europe also spiked in line with crude futures, but markets sustained a shallow contango structure, signaling a lack of response at the front of the curve.

In the naphtha market, the front-month crack inched up in midafternoon European trading, but remains weighed down by the strength in crude oil prices.

In the event of disrupted supplies from the Haifa refinery, Mediterranean markets could face tighter naphtha availability, though physical markets exhibited a more muted response to the events of the weekend, sources said. Meanwhile traders warned of demand-side contractions in a high oil price environment,

"The longer we stay in this high flat price, the higher the chance that demand will be hurt," one trader said.

Gasoline flat prices rebounded on the back of escalating tensions, though spreads remained rangebound in early trading June 16. However sources emphasized that the US market remains sensitive to the situation, having relied on a transatlantic arbitrage if demand snaps higher.

Fuel oil cracks surge

Fuel oil paper flat prices were higher in European mid-day trading as markets responded to the prospect of tighter sour crude supply ahead of peak power generation season.

European HSFO flat prices had been slow to respond to the crisis June 13 as markets stayed depressed by broader demand weakness, but jumped June 16 on mounting fears of tightness.

During mid-day trading on June 16, the July 3.5% FOB Rotterdam fuel oil barge crack was trading at minus 50 cents/b, up from minus $2.62/b at 1630 London time on June 13.

The potential escalation of tensions may also impact global shipping markets which may dampen demand for European very low sulfur fuel oil which is already struggling with poor regional demand.

During European mid-day trading the equivalent 0.5%S FOB Rotterdam barge crack was trading at $5.02, up from $4.742/b at the London market close on June 13.