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
Today, like many Americans, I feel anger, sorrow, pain over the deaths of 13 American servicemen as well as many innocent men, women and children of Afghanistan that were killed or injured in the bomb blast yesterday. Right now, it would be so easy to lash out and assign blame but today is not that day. Today should be a day of prayer. Prayer for the families of those who lost their lives and prayers of protection for those that are still in harm’s way. Please pray that we can get the rest of the Americans and the Afghanis that helped us out of there safely with no more loss of life.
We should also pray a prayer of protection from what could be a devastating hurricane that could be on the same track as hurricane Katrina. Tropical storm Ida has the potential to become a major hurricane, potentially a category 3. Oil platforms are already shutting down. Reports are stating that BP evacuated four oil production platforms and shut down U.S. Gulf of Mexico production. The storm will also slow down petroleum and natural gas exports and imports as well. Gulf of Mexico offshore wells account for 17% of U.S. crude oil production and 5% of dry natural gas production. Over 45% of total U.S. refining capacity is along the Gulf Coast.
For the crude oil market, there is still significant upside risk going into winter. The market of course is going to focus today on not only the storm but what comes out of the meeting at the Jackson Hole symposium. More Fed officials are calling for a taper, perhaps as early as October which should give the dollar more strength. This could also cause a headwind for oil prices. Still, our expectations are that OPEC next week will pause their production increase because of the concerns about the delta variant of covid-19 and because of that, we still believe the market is going to be under supplied going into the end of the year. Product demand right now for gasoline and diesel is exceptionally strong and that may be one of the reasons why the Fed believes they’re going to have to start to remove some of the extraordinary stimulus they’ve pumped into the system. Inflation fears are becoming real for the Fed and with more government spending coming, they may want to put on the brakes.
With hurricanes you never really know how they’re going to play out. Sometimes they do more damage to the supply side and sometimes they do more damage to the demand side, so we expect some volatility. If we do get a post hurricane sell off, use that opportunity to lock in your hedges going into winter. It may be your last best chance before this market takes off.
Alexander Stahel tweeted that, “Oil Rigs in Venezuela went from 50 five years ago to ZERO in the country with the largest oil reserves globally. Zero oil exports today. Socialism & resource nationalism fail every single time & make the poor even poorer. Fight corruption, not free markets!” Well said.
The natural gas chickens came home, whatever that means. The underlying bullish fundamentals played out in epic fashion after the Energy Information’s Administration (EIA) released an almost disturbingly bullish report, raising fears about the adequacy of supplies going into winter. It did not help that the market is also coming to grips with more production getting shut down in the Gulf of Mexico. The EIA said that working gas in storage was 2,851 Bcf as of Friday, August 20, 2021, according to EIA estimates. This represents a net increase of 29 Bcf from the previous week. Stocks were 563 Bcf less than last year at this time and 189 Bcf below the five-year average of 3,040 Bcf. At 2,851 Bcf, total working gas is within the five-year historical range.
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