Geopolitics drove fuel prices this week

This week the price moved on geopolitics rather than crude balances. A U.S. blockade in the Gulf of Oman and Ukrainian strikes on Russian refineries tightened freight and the product market, and California jobbers who normally track crude balances felt it in the rack.

The U.S. blockade in the Gulf of Oman has cut Iranian crude out of the market. Bob McNally of Rapidan Energy told CNBC that Tehran's barrels are now "irrelevant" to global balances after the reinstated blockade choked exports, following the collapse of the "deal to make a deal" in July. Take a couple million barrels a day off the table and the physical market gets tight fast, which is showing up in freight.

Record tanker rates

Very large crude carriers crossed $130 million apiece for new and second-hand ships in the second quarter, an all-time high, per Braemar data cited by the Financial Times. One-year charter rates also set a record. When Middle East producers are paying up to lock in physical tankers, they're pricing in disrupted routes and a scramble for barrels that still move. Chinese refiners just bought 8 million barrels of Basrah Heavy and Medium for prompt delivery as Hormuz crossings thinned to 95 vessels in the week to August 17, down from 118. Higher freight lands in the delivered cost of imports, and eventually in the rack.

Russian refining hit

Ukraine struck the TANECO refinery in Tatarstan overnight August 20 and set a fire, plus the Taman oil terminal on the Kuban coast. TANECO processes up to 16 million tons of crude a year. A day earlier, drones hit Rosneft's Bashneft refineries at Ufa. This is Ukraine's campaign against Russian refining back in force, and it tightens the global product market at the margin even though those barrels don't clear U.S. docks. Diesel is the swing product, and Europe backfilling lost Russian output pulls on the same cargoes Gulf Coast exporters chase.

Permian keeps pumping

The one bearish counterweight is at home. EIA says Permian operators are getting more oil and gas per well by drilling longer horizontal laterals, including super-laterals past 15,000 feet. More output per well means U.S. crude supply holds up even without a rig count jump, which caps how far the geopolitical premium can run.

Midwest propane record

U.S. propane inventories hit an all-time high, with the Midwest leading the weekly build and the Gulf Coast setting a regional record, per RBN. Retailers heading into fall have a fat cushion, and pre-buy pricing should reflect it.

What to watch

Whether Hormuz crossings keep sliding or stabilize is the crude signal to watch. Diesel cracks are the tell if Ukraine keeps hitting Russian refining. And watch whether Permian volume growth is enough to soften any spike the freight market is signaling. Crude could ease if the strait stays open.