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
Hurricane Ida continues to take its toll and now is breaking the record as the hurricane that has done the most disruption to oil supplies in history. The Bureau of Safety and Environmental Enforcement (BSEE) reports showing that 76.88% of oil production is still offline in the Gulf of Mexico as well as 77.25% of natural gas production. The slow recovery of oil and gas production in the Gulf of Mexico is now at a pace that is slower than Hurricane Katrina and Hurricane Ivan. In other words, Hurricane Ida, when looking at oil production, was the most destructive storm in history. Production losses from the Gulf of Mexico will continue to add up, further tightening the U.S. oil supply and gas supply. That means that oil prices normally might be going down during the shoulder season or continuing to stay strong, so if these production issues aren’t corrected quickly, we are very vulnerable to price spikes in the future. Global natural gas prices are going through the roof and are creating a risk to the global economy; at the very least the European and Asian economies. Tropical storm Mindy that formed yesterday isn’t helping matters but it’s already on land in production areas.
Natural gas prices spiked yesterday and that was something we were warning was going to happen sooner or later. A big short position in natural gas had to be covered as the reality of the loss of production from the Gulf of Mexico continues to add up and will drive our storage levels even lower ahead of the key winter heating season. The spike in gasoline is probably a preview of what we’re eventually going to see for gasoline and diesel. Just like the natural gas market, oil, gasoline and diesel are a powder keg that is getting ready to explode. The only thing holding me back is the fact that we are in shoulder season and the possibility that new covid restrictions could hurt demand in the future. We’re seeing record-breaking demand in the United States, we’re seeing record-breaking demand in India and a big rebound in demand in China.
Gasoline pump prices should not be going down anytime soon and I think there’s still a very strong possibility that they could start spiking higher, especially as demand picks up as we get closer to the holidays. The Department of Energy reports that five refineries in Louisiana remain shut, accounting for about 1.0 million b/d of refinery capacity, or approximately 6% of the total U.S. operable refining capacity. All three refineries in the Baton Rouge area and one near New Orleans (1.3 million b/d of refinery capacity) have initiated the restart process, although the refiners will not produce at full rates for several days. Refinery operations cannot restart until feedstock supply, power, and other essential third-party utilities are restored. Fuel stocks in the area are being drawn down from storage while refineries and offshore production are restored. They also report that widespread power outages, fuel shortages, and high demands are leading to retail gas station outages in impacted areas. Available stations are experiencing long lines and high demand. Resupply may be impeded by power outages at terminals. Heavy traffic in some areas is also delaying resupply efforts.
We did get the first snapshot of what the impact on inventories might be because of the storm and let’s face it, it was not pretty. MarketWatch reported that the American Petroleum Institute (API) showed that U.S. crude supplies fell by 2.9 million barrels for the week ended Sept. 3, according to sources. The API, which released its data a day later than usual due to Monday’s Labor Day holiday, also reportedly showed an inventory decline of 6.4 million barrels for gasoline, while distillate stockpiles fell by about 3.7 million barrels. Crude stocks at the Cushing, Okla., storage hub, meanwhile, edged up by 1.8 million barrels for the week.
Inventory data from the Energy Information Administration will be released Thursday at 10a central time. On average, the EIA is expected to show crude inventories down by 7.4 million barrels, according to a survey of analysts conducted by S&P Global Platts. The survey also calls for supply declines of 2.4 million barrels for gasoline and 2 million barrels for distillates.
S&P Global Platts also put out a report that shows that OPEC production, despite the promised increase, has yet to happen. OPEC and its allies raised crude production by just 50,000 b/d in August, despite loosening their output quotas, as disruptions and maintenances in a few countries capped the group’s gains. S&P Global Platts said that OPEC’s 13 members pumped 26.97 million b/d in the month, a rise of 140,000 b/d from July, while nine non-OPEC partners led by Russia added 13.29 million b/d, a drop of 90,000 b/d, according to the latest S&P Global Platts survey. The combined output of 40.26 million b/d marks the sixth straight month the alliance has stepped up production. But it could have been more in August. The current OPEC+ supply accord calls for monthly 400,000 b/d increases in the group’s collective quotas, as it aims to capture the global economic recovery from the pandemic. Iraq, Russia, Saudi Arabia, and the UAE were the largest gainers in the month, but Kazakhstan underwent major field maintenance that saw its output decline, and Nigeria suffered a significant oil spill near a key export terminal that shut-in production. Several other members continued to pump below their allocations due to a lack of spare capacity.
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