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
Oil prices got hammed as Hurricane Dorian is expected to destroy demand and wreak havoc with U.S. oil and product inventory data. Our prayers are with those in the Bahamas where the storm has done unbelievable damage. In the U.S. the surge of gasoline demand as people filled their tanks to try to stay ahead of weather computer models and evacuation orders will be offset by canceled flights, canceled travel plans and the shutdown of businesses, not to mention the potential loss of electricity. Crude oil is rebounding today on risk after reports that Hong Kong leader Carrie Lam said she would formally withdrawal a bill allowing extradition to mainland China to “allay public concerns,” meeting one of the protesters major demands.
The crude oil market also had to adjust to concerns that the OPEC plus Russia alliance might not be as strong as it once was. Oil prices saw pressure from Friday after reports emerged that Russian Energy Minister Alexander Novak said Russia’s oil output cuts in August will be slightly smaller than those agreed to under the deal between OPEC and non-OPEC producers. That sent oil lower, and there were other reports that OPEC may also be wavering on cuts.
Bloomberg News also reported that OPEC production is back on the rise. Bloomberg said, “OPEC’s Middle East oil exporters boosted crude supplies to their highest level in four months in August, even as the group’s biggest producer Saudi Arabia said that it won’t tolerate a continued slide in prices and is considering all options. Saudi Arabia, Iraq, Kuwait, the United Arab Emirates and Iran, which together account for about three-quarters of OPEC’s entire production, shipped an average of 15.73 million barrels a day of crude and condensate in August, tanker tracking data compiled by Bloomberg show. That was an increase of 736,000 a day from July. Flows of crude and condensate, a light form of oil extracted from gas fields, rose from four of the five regional exporters, with only Kuwait shipping less oil last month than it did on July. The biggest increases came from Saudi Arabia and the U.A.E., whose exports were each up by more than 300,000 barrels a day. Iraq’s exports from its Persian Gulf Basra Oil Terminal rose by 150,000 barrels and Iran’s observed shipments were up by 65,000 barrels. In contrast, shipments from Kuwait fell month-on-month by 106,000 barrels a day. Observed shipments from Iran rose to 360,000 barrels a day last month, from a revised 295,000 in July. Those figures may underestimate actual flows because tracking signals haven’t been received for more than a week from 37 Iranian tankers, out of a fleet of 48 vessels. While many of the ships are probably being used to store crude or condensate close to the Iranian coast, they could also have loaded a cargo in August and departed while running dark. India, Japan and South Korea all continued to shun Iranian barrels last month, with China the only confirmed Asian destination for August-loading cargoes. Four tankers hauling a combined 3.7 million barrels of crude headed toward the Mediterranean in August, while three more carrying about 4 million barrels headed east.”
Weak manufacturing data in the U.S. yesterday did not help oil demand expectations either. The ISM U.S. Manufacturing Purchasing Managers’ Index fell to 49.1% in August, the lowest reading in more than three years. The good news is that may increase the odds for a more aggressive interest rate cut, which could help oil rebound.
If China can backdown on Hong Kong maybe they will also backdown on trade. Trade war worries are still adding uncertainty. Yet despite the big move down in crude oil, we are still locked in the same wild trading range. The market may reverse course on the next tweet but for now, it looks like we will bounce back again. Hurricane Dorian will add more uncertainty and cover the reality that the global market is tighter than many might think. OPEC production inched up because the market demanded it, so we still believe that we are on a path to tighter supply. We think OPEC will get it together. In the meantime, enjoy the volatility! The American Petroleum Institute (API) report is out tonight and that should be supportive. Yet it may come down to the ultimate path of Hurricane Dorian to give us direction for the next few weeks.
Oil producers in the U.S. are struggling as bankruptcies rise. Nick Cunningham at Oil Price wrote, “Lower oil prices and ongoing financial stress in the U.S. shale industry are creating headwinds for drillers, and it appears increasingly likely that supply growth could undershoot forecasts. U.S. oil production fell in June to 12.082 million barrels per day (mb/d), according to new data released by the EIA on Friday. That is a decline of 33,000 bpd from May – not a huge drop off, but a decline, nonetheless. In previous months, maintenance at offshore oil fields made up a big chunk of the declines. While the overall figures for the entire U.S. appeared to disappoint, temporary declines offshore masked ongoing growth in the Permian. But this time around, blame cannot simply be pinned on offshore maintenance.
Remarkably, production in Oklahoma fell by a rather substantial 58,000 bpd, a sign of problems in Oklahoma’s SCOOP and STACK plays, which have proved to be somewhat of a disappointment. Anecdotally, companies have said that they were pivoting away from Oklahoma’s shale because of higher-than-expected costs and lower-than-expected production volumes. The latest EIA data suggests that lower investment in Oklahoma could be taking a toll. Alaska also lost 19,000 bpd in June, which is noteworthy in light of BP’s recent sale” as reported by Oil Price.
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