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Good morning. WTI is hovering just over $91/bbl this morning — down more than 10% in two sessions — which tells you almost everything you need to know about how sensitive this market has become to diplomatic signals.
Wednesday was one of the wilder trading days we've seen in a conflict already full of them: reports emerged that the U.S. had sent a one-page Memorandum of Understanding through Pakistani intermediaries, Brent dropped more than 8% on the headlines, and WTI briefly cratered below $93… all before anyone on either side had formally agreed to anything.
The MoU as currently constructed would have Iran easing its grip on the Strait of Hormuz while the U.S. gradually lifts its naval blockade over a 30-day period — though officials note that some issues, including Iran's demand to charge tolls for vessels transiting the waterway, remain unresolved. Trump expressed optimism Wednesday but immediately hedged, calling Iranian acceptance "a big assumption," and threatened renewed strikes "at a much higher level and intensity" if talks collapse. So… progress, sort of, with a sword of Damocles dangling overhead. That's been the operating environment for eleven weeks now.
The market's reaction feels like it's already pricing in a clean reopening of the Strait, and that's doing some real work on risk. About 1,600 ships are still stuck in the waterway, and even if an agreement is reached today, shipping companies won't move through Hormuz without proper insurance coverage, which wartime exclusions have largely eliminated — meaning normalization of physical flows is likely to take weeks, not days. The price can move on diplomacy; the barrels can only move on ships. Those are two different clocks.
On the propane side, yesterday's EIA report was interesting and underscored some of the tension in the markets. On the one hand, you have a domestic market that is still well supplied; production hasn't missed a beat, and we're in what I refer to as build season.
On the other hand, U.S. export volumes have been running strong as of late, with the global bid for American LPG as strong as we've ever seen it. Propane exports jumped by 426,000 barrels per day in a single week earlier this spring and have stayed near the 2 million barrel-per-day ceiling of our export infrastructure since.
So here's the propane question relative to the war in the Middle East: if the Strait reopens, what happens to the export bid? In theory, if Middle Eastern LPG comes back online, some of that 2M/bpd of U.S. export demand finds a cheaper alternative. That's a bearish scenario for domestic TET. Propane's value to crude oil remains on the historically low side, in territory that has historically been a solid buying signal.
The question for propane buyers is whether to treat that discount as a buying opportunity or wait for the Strait to reopen, which could push prices even lower.
We have all witnessed a number of false starts on the road to ending the War in Iran, and the only certainty is that everyone is uncertain, which fairly sums up the thinking of most of the energy analysts I have been following during this crisis, including some of the most successful investment firms in the world.