Iran Conflict Brief: Jan Stuart on What a US Diesel Export Ban Would Mean

Daniel Sternoff (0:01)

Events in the Middle East are changing quickly, and the complexities of understanding the global energy landscape grow deeper by the hour. Join me as we talk to leading experts on the latest developments in the region and what it means for the rest of the world.

Welcome to our rapid response series, the Iran Conflict Brief, a special edition of the Columbia Energy Exchange podcast. I'm Daniel Sternoff, a Senior Fellow at the Center on Global Energy Policy.

We are recording this podcast on September 25th at 10 a.m. in Washington, DC., 5:30 p.m. in Tehran, and 6 and 5 p.m. in Abu Dhabi and Riyadh. We are now seven months into the greatest disruption in oil supply in history with no resolution in sight. This week on the sidelines of UN General Assembly in New York, US and Iranian officials held their first indirect talk since the Mirandum of Understanding collapsed in July. But there are no signs either side is ready for concessions to return to something like the MOU, let alone a more durable deal to end the war.

Energy flows through the Strait of Hormuz are contested and confusing. The US blockade of Iranian ports has driven Iranian crude oil exports close to zero, while US naval escorts and dark transits through shipping lanes close to the Omani Coast have facilitated a partial recovery in crude oil flows from the Arab Gulf states. These flows have been volatile and difficult to track, sometimes around 6-8 million barrels per day, sometimes as high as 10 million barrels per day or more, but still well below pre-war transits of 20 million barrels per day of combined crude and products. Whatever the exact number, it's unacceptable for Iran to see its exports near zero, while its neighbors are getting more oil out. So attacks on ships continue, and the Houthis, Iran's allied proxies who sat out the war's first phase, are now in open warfare with Saudi Arabia. The Houthis have choked off flows through the Bab al-Mandab, and attacks on critical Saudi infrastructure such as the East-West pipeline have disrupted Saudi Arabia's principal bypass around Hormuz.

As the crisis drags on, oil markets feel like the proverbial frog in slowly boiling water. Brent crude is at $105 a barrel, below a peak price of $126 seen in April, but oil markets are far, far tighter than the spot price suggests, with extreme pricing and refined product markets, tanker rates, and the structure of the crude futures curve. US diesel cracks are at unprecedented levels near $100 a barrel, and national average retail diesel prices are over $6.50 a gallon, up 85 percent from pre-war levels. Many Republican senators and diesel-thirsty farmstates are demanding a ban on diesel exports, and President Trump, over the strong objections of many of his cabinet secretaries, is considering it. Booking a crude tanker from the Middle East to Asia is 20 times more expensive than pre-war levels, and in the futures market, a spot barrel of crude oil is nearly $7 more expensive than a barrel a month from now, among the most extreme levels of backwardation in history and a sign that this market is scrambling for crude.

The oil market has been surprisingly resilient throughout this crisis, but when so many things are bending, it's a matter of time before something breaks. I'm joined today by Jan Stuart, the Global Energy Strategist at Piper Sandler. Jan is one of the most astute energy economists in the field, with the ability to dive deep into micro data and to zoom out to see the big picture. He has built leading energy franchises at Credit Suisse, Macquarie and UBS. He was a journalist in the 1990s and began his career at the International Energy Agency in Paris. Jan, as a good Dutchman, rides his bike everywhere throughout New York City in rain, sleet and snow. You might think it's a miracle he knows what a gallon of gasoline costs, but as a self-described oil geek, he knows the price of every grade of crude and every type of oil product in every region of the world. So there's no one better to talk about what is happening right now in oil markets than Jan. Jan, good morning.

Jan Stuart (4:13)

Hey, good morning, Danny. Thank you for that intro. I loved it.

Daniel Sternoff (4:17)

Excellent. So Jan, I have about 1,000 questions for you, but I want to talk about crude oil products, shipping and demand so we can really go deep into the oil market. But let me start first with crude oil.

So what's your assessment of how much crude is flowing through Hormuz, and why is the crude market tightening up so much right now, even though we've seen a reasonable recovery in those flows?