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
The Energy Information Administration (EIA) showed a significant impact on the U.S. refining industry from Hurricane Laura, and it was not pretty. The EIA reported refinery operations plunged to just 71.8% of their operable capacity last week. The drop was in part forced and planned seasonal maintenance.
That drop in runs led to a larger than expected crude build of 2.0 million barrels. Refinery inputs fell to just 12.8 million barrels per day. That caused gasoline production to fall to 8.9 million barrels per day. Distillate fuel production also fell to 4.4 million barrels per day. Supplies of gasoline and diesel fell significantly but so did weekly demand. The EIA reported that gasoline inventories fell by 3.0 million barrels last week. Demand dropped, but it should be noted that supply is just 3% above the five year average for this time of year. That should get worse when demand goes up. Distillate fuel inventories decreased by 1.7 million barrels last week and are about 20% above the five year average for this time of year due to continued weak jet-fuel demand.
Oil also has to deal with uncertainty around OPEC Plus. Reuters is reporting that, “A debate within Iraq over whether it should ask to be exempt from OPEC+ oil supply cuts has resurfaced as low prices squeeze its finances, challenging a government struggling to tackle the destruction of years of war and rampant corruption. OPEC’s second-biggest producer, Iraq, has failed in the past to fully comply with OPEC+ oil output reductions, pumping above its production targets since the pact was first signed in 2016 between OPEC and its allies led by Russia.
Iraq always believed they were not properly treated in December 2016 when they were not exempted. As the economy continues to reel from low prices, this issue keeps resurfacing,” said an OPEC source. Iraq’s economy and oil sector were battered by years of wars, sanctions and a stubborn Islamist insurgency triggered by the U.S. invasion. Baghdad complained it had struggled to revive its stagnating oil industry, at a time where other OPEC members benefited and boosted their market share. Iraq relies on oil to fund 97% of its state budget. Iraqi Finance Minister Ali Allawi told parliament on Wednesday that reforming Iraq’s economy would take five years of work and that state debt amounted to 80-90% of national product, while foreign debt was at $133 billion according to Reuters.
Oil price and natural gas prices are down but what consumers pay for energy has gone up two years in a row. While historically energy expenditures are less than before, they are rising. The EIA reports that U.S. total energy expenditures, the total amount of money spent directly by consumers to purchase energy, increased for the second year in a row to $1.3 trillion in 2018, according to the latest data in the U.S. Energy Information Administration’s (EIA) State Energy Data System (SEDS). U.S. energy expenditures increased by nearly $200 billion from 2016 to 2018, a 17% increase in real terms, as both energy consumption and average energy prices rose faster than population and gross domestic product (GDP) in the United States.
EIA calculates energy expenditures by source and sector as the product of end-use energy consumption and average energy prices paid by end-users. EIA also calculates energy expenditures per capita (per person) and energy expenditures expressed as a percentage of GDP. U.S. energy expenditures per capita, which include the amount of money spent on all energy used in businesses, offices, homes, industrial facilities, and vehicles, increased from the 2016 low of $3,215 per person (the lowest value since 2002) to $3,891 per person by 2018, a 16% increase. In the same period, the share of U.S. energy expenditures per GDP, which compares the amount of money spent on energy versus the value of all goods and services in the entire U.S. economy, increased by 11%. Total energy expenditures increased in every U.S. state, along with energy expenditures per capita and energy expenditures as a percentage of GDP, from 2016 to 2018.
Overall the oil correction should be over. The risk-off environment seemed to add to oil woes. It will be rocky, but September should set the stage and a base to lift off in November and December.
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