Bad for ↓
Oil fell about 9% on November 4 as traders bet a US-Iran peace deal grows more likely. Diesel is scarce partly because of Strait of Hormuz disruptions, so peace would ease that squeeze, hurting refiners Valero, Marathon Petroleum and Phillips 66.
Source: OilPrice.com ↗
War can make one fuel scarce, letting its makers earn extra. Peace can remove that advantage, even as the underlying commodity gets cheaper.
Brent crude fell sharply on November 4 after Trump told the Financial Times the US has no immediate plans to strike Iran. Traders reduced their bets on escalation, though no deal is in hand. Producers such as Exxon Mobil (XOM) and ConocoPhillips (COP) get less for each barrel. Airlines such as Delta (DAL) and United (UAL) pay less for jet fuel. Refiners face a different problem. Cheaper crude lowers their raw material cost, but their recent profits came from scarce diesel. Drone strikes on Russian refineries and Hormuz disruptions caused that shortage. If peace restores Gulf flows, diesel prices could fall faster than crude, shrinking margins at Valero (VLO), Marathon Petroleum (MPC) and Phillips 66 (PSX).
Investors sold refiners alongside producers on November 4. Marathon Petroleum fell 8.1%, Valero 5.8% and Phillips 66 4.5%. Exxon Mobil fell 4.6% and ConocoPhillips 5.2%. Delta rose 7.2% and United rose 8.0% as fuel costs looked set to ease.
Talks to end the Iran war may stall, and the Hormuz disruption could continue. Within the next few weeks, the warning sign would be Brent climbing back above $100 while weekly US diesel prices stay near the $6.29 seen in the week to November 2. That would mean the conditions behind refiners' recent diesel profits remain.
Peace could stay out of reach. The diesel shortage also comes from damaged Russian refineries, and peace with Iran does nothing to fix them. Only a Ukraine settlement, which traders are also weighing, would stop the drone strikes. Phillips 66's own executive said a large amount of distillate is offline, so diesel could stay tight and refiners could still benefit from crude getting cheaper. New Jersey's governor wrote to port operators on November 2 urging them to refuse Russian diesel imported under the Trump administration's October license, which could keep East Coast diesel tight.
Brent crude dropped below $95 a barrel because traders see less risk of escalation and better odds of a peace deal. The White House blamed the war for its midterm losses, which made a change of course look more likely.
Diesel has been scarce because Ukrainian drones hit Russian refineries and shipping through the Strait of Hormuz was disrupted. Peace would let more fuel move out of the Gulf, which means the diesel shortage could ease. Prices of scarce goods usually fall fastest when supply returns.
Refiners earn the gap between what crude costs and what diesel sells for, which is called the crack spread. A scarce product widens that gap, like a bakery charging extra when every other bakery is shut. So if diesel supply recovers, Valero, Marathon Petroleum and Phillips 66 are likely to earn less on each gallon.
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