With no indication the fragile ceasefire agreement reached at the last-minute Tuesday had as much to do with long-term solutions as it did in providing a way to de-escalate the grave situation, an opportunity may be presenting itself for those so inclined to manage risk of another spike in energy prices. Especially for fall use of diesel in the case of crop producers who may be reading this.

Spring fuel demands are one thing, but the amount of diesel burnt in the fall is another beast all together. Not to mention fuel tanks may already be full to look after seeding requirements. The silver lining in both the inverted energy markets and the two-week ceasefire is they present an opportunity to manage fuel price risk.

Regarding the ceasefire, as it may be the most fleeting, there is every reason to believe it served its purpose in de-escalating the situation on Tuesday but is unlikely to survive. The Trump administration has already indicated it has a vastly different plan on most of what Iran was demanding in its 10-point proposal that was the basis of the agreement.

Trump has posted on social media that the U.S. will be "helping with the traffic buildup in the Strait of Hormuz" and the toll Iran says it will collect could be a joint venture with the U.S. In the meantime, Iran has been firm on that point -- they will control the passage of vessels (as has been the case for the past month) and collect a $2 million toll per vessel, which they will share with Oman. One problem lies within Iranian reports that they only intend on letting 10 to 15 vessels through over the two-week negotiation period as leverage in bargaining, given their lack of trust in the U.S. So essentially status quo regarding the traffic through the Strait.

Trump also posted that the U.S. will be "hangin' around in order to make sure that everything goes well." Yet one of the Iranian demands were withdrawal of U.S. combat forces from the region. In addition, Israel has confirmed it will abide by the deal other than reiterating that it will continue to attack Lebanon -- another point that goes against the Iranian demands. And Israel has already continued to do so.

Completely different opinions on future uranium enrichment and plans for nuclear material inventory are further examples of the challenges likely preventing this from resulting in a long-term peace agreement.

One of the other glaring problems lies within the questionable leadership of Iran itself. It is the IRGC (Islamic Revolutionary Guard Corps) that claims to be in charge and does not appear to be part of the agreement process. Yet it is clearly in control of the weaponry given attacks since the agreement on the UAE, Qatar, Kuwait, Israel and the East-West pipeline in Saudi Arabia. And warnings of a forceful response to any attack against Iran.

It's worth noting at this stage all ship owners making statements so far have suggested they will not be testing the IRGC's resolve in enforcing their control over the Strait of Hormuz. They will await further clarity and essentially leave traffic through the Strait at a standstill (other than Iranian-connected tankers).

In the event the ceasefire does fail, the nearby ULSD contract has highlighted the risks that lie ahead for the summer and fall. Diesel prices went from $2.0239/gallon on Jan. 7 to $4.6129/gallon on Apr. 7. That makes the Wednesday morning low for the August ULSD contract of $3.0780/gallon look quite reasonable.

There are two main reasons the deferred contracts are relatively cheaply priced. The first is the optimism that, by then, the war will be a distant memory, the Strait of Hormuz will be operating normally, and global supplies of refined products will be much more ample. All of which could be wishful thinking compared to the reality of rebuilding damaged or destroyed energy infrastructure in the region and Iran's insistence that it will permanently control the Strait going forward.

The second reason is related to risk management in trading. Bull spreading is a term describing the buying of the nearby contract and managing risk (associated with an event such as Tuesday's ceasefire) by selling a deferred contract. When physical supplies are tight, contract prices go inverted with a premium placed on immediate delivery. The more concern there is about availability of physical supply, the greater the premium for nearby contracts (or the greater the inverse in price). That does not necessarily mean fundamentals are bearish on deferred contracts as much as they are being sold for risk management purposes. Then as time passes, those short positions are bought back and as the deferred contract becomes the nearby one, it experiences even greater buying interest if the physical supply concerns remain. In this case, in July, as the August contract becomes the nearby futures contract, bull spreading could inspire it to take out the spring high price should the conflict be unresolved. Just going into harvest fuel demand.

Something to keep in mind while exploring risk management options available to you.

For further information, see the March post at https://www.dtnpf.com/… and the December post on the topic at https://www.dtnpf.com/….

I welcome feedback along with any suggestions for future blogs. My daily comments can be found in Plains, Prairies Opening Comments and Plains, Prairies Quick Takes on DTN products.

Mitch Miller can be reached at mitchmiller.dtn@gmail.com

Follow him on social platform X @mgreymiller

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