Middle East Tensions Spark Global Energy Price Surge

Escalating tensions in the Middle East have pushed energy prices higher, particularly for diesel and oil. The ICE Gasoil Crack, a measure of the cost of producing diesel, has reached record highs, trading around $79/bbl. This is largely due to disruptions to Middle Eastern and Russian diesel exports, which have been exacerbated by the ongoing conflict in the region.

The Strait of Hormuz, through which oil flows from the Persian Gulf to global markets, remains a point of concern. Despite reports that 17m barrels of oil flowed through the strait on Monday, ship trackers have estimated much lower volumes. This uncertainty has added to market volatility and tightness in refined product flows.

The latest API numbers show US crude oil inventories fell by 2.6m barrels over the last week, while distillate stocks fell by 300k barrels. The global refining system has little slack to make up for these disruptions, which are likely to remain highly elevated and volatile as demand increases seasonally.

Meanwhile, European gas prices have climbed to their highest level since 2023, with front-month futures breaking above EUR75/MWh in early morning trading today. This is largely due to fading expectations for a recovery in Persian Gulf LNG exports, which are crucial for Europe given lower-than-usual storage levels.