Phil Flynn is writer of The Energy Report, a daily market commentary discussing oil, the Middle East, American government, economics, and their effects on the world's energies markets, as well as other commodity markets. Contact Mr. Flynn at (888) 264-5665
As if Florence was not enough. Not only are we preparing for Hurricane Florence in what could turn out to be the strongest mid-Atlantic storm in recorded history, now we must deal with the risks of more storms that are heading to and developing in the Gulf of Mexico, as well as lots of news on regular and changing market fundamentals. We had American Petroleum Institute Data (API) that showed a major drawdown in crude supply as well as a bigger than expected increase in product supply. You have violence in Libya that could further impact their oil exports and you have Russia warning us about a ‘fragile” oil market. You have the Brent oil trading at a huge premium to the U.S. West Texas Intermediate contract, which will cause U.S. oil exports to surge back to record highs, but at the same time you have a report from the Energy Information Administration (EIA) that has once again lowered the outlook for U.S. oil production as U.S. shale struggles with bottlenecks, infrastructure and profitability. While the challenges in the market are nothing compared to what millions of Americans will face, these storms both real and figuratively can impact prices of many commodities across the board.
When the storms arise, many traders turn to meteorologist Michael Schlacter for storm predictions. He has dire predictions about the impact of Hurricane Florence. He warns that the extreme storm surge will reshape Carolina’s shoreline forever. He says that Florence may then stall over land, becoming Mid Atlantic’s version of Harvey’s flooding.
While this type of flooding may cause significant demand destruction, it can also knockout pipelines that travel through the states taking down power, and shutting down pipelines like the Colonial Pipeline as it carries more than 1 million barrels of gasoline per day from Texas and Louisiana to the East Coast.
While most believe that Florence will cause widespread demand destruction, the market is already pricing in risk to supply as the Atlantic storm machine keeps churning them out. Michael Schlacter says that the now Tropical Storm ISAAC is making a bee-line for Lesser Antilles, likely as a Hurricane. He says it should strengthen back to Hurricane status prior to reaching the Caribbean, it may wane within the Caribbean Sea sheer, but future impacts to North America remain alive.
Then you have storms to be named later. Schlacter says that future classifications of “JOYCE” & “KIRK” appear probable in coming weeks. He warns that the system now known as Invest 95L will likely become a concern for Gulf of Mexico/Gulf Coast after development. So, it is hard to say if the oil storm surge buying is just about Florence, or the possible risk to oil operations that will impact the Gulf of Mexico for the next couple of weeks.
That is why the oil added to gains after the API supply report. It was probably not the best time to report a massive 8.636 crude draw. They even reported a much larger than expected 1.165 million barrels drop in Cushing Crude supply. If it were not for a major 5.821-million-barrel increase in distillate and larger than expected 2.122-million-barrel increase in gasoline supply, the market might have gone parabolic. Yet, with millions fleeing Florence and the potential for Gulf Storms next week, a price spike might be in order. The Trump Administration better be ready to release some of our oil reserve.
Shale oil was supposed to come to the rescue! While the U.S. shale industry has done miracles, the realities of shale limitations are starting to show up. The EIA cut its estimate for U.S. crude production to 10.66 million barrels a day this year and down to 11.5 million barrels a day next year. We had predicted that this would happen. The EIA has been overestimating shale output and while the production numbers are amazing they still are not as strong as the marketplace was pricing in.
The EIA also raised their oil price forecast, The EIA said that EIA’s September outlook revised expectations for Brent spot prices upward to an average of $73 per barrel for 2018. The change was largely due to lower expectations for Canada’s crude oil production and OPEC’s condensate production. EIA forecasts Brent spot prices to average $74 per barrel in 2019.” “The United States remains on pace to set new crude oil production records in 2018 and 2019. We see crude production averaging 10.7 million barrels per day in 2018, up almost 14% from 2017.” Iranian crude oil production was also down 200,000 barrels per day in August compared with July.
This comes as Russia warns us about oil. Reuters says that “Global oil markets remain “fragile” due to geopolitics and production declines in several regions, Russia’s energy minister said on Wednesday, but added his country could raise output if needed.”
Demand destruction versus heat. We could see a historic drop in Nat gas demand after the storm. Andrew Weissman of EBW Analytics says that the potential for massive demand destruction in the Carolinas and neighboring states due to Hurricane Florence, has not yet been adequately priced into the market. He points out that Hurricane Hugo destroyed much of the transmission grid in South Carolina nineteen years ago, requiring months to rebuild. Hurricane Florence is even more massive than Hugo was. The loss of demand is likely to be 5-10 Bcf—and could be much greater.
In the big picture, the “EIA forecasts U.S. dry natural gas production to increase by 10% in 2018 to a record high 81 billion cubic feet per day, with continued growth expected in 2019.” “Despite record U.S. natural gas production, the September forecast expects natural gas inventories to be 14% below the 5-year average by the end of October to levels not seen at the start of the heating season since 2005.” “EIA’s September forecast expects natural gas’s share of U.S. total utility-scale electricity generation to reach 35 percent in 2019, as coal’s share falls to 27%. Assuming the forecast holds, non-hydropower renewables will claim 11% of U.S. total utility-scale electricity generation in 2019.”
Dow Jones reported the attack on Libya’s state-run National Oil Corp has triggered a midday rally in oil, giving a lift to energy-related stocks. Hogs went crazy as fears of wiping out the hog population in the Carolinas went to wiping out demand and processing plants. Lumber moved higher as well.
There is going to be so much to watch so that is why you should be watching the Fox Business Network! Get the Power to Prosper! Call to get my daily trade updates at 888-264-5665 or email me at firstname.lastname@example.org.
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