Crude oil prices whipsawed on stories that could have short-term bearish or bullish consequences. Oil was under technical pressure early yesterday as a surprise supply increase had traders and funds take profits. Yet one week’s data does not a market make. Oil prices then leapt higher after China ordered energy companies to secure the supply of oil and coal at any cost as the Chines government is saying that the blackouts and power outages are unacceptable. That means China will go on an oil buying spree securing supplies at any coast, outbidding their competition for a global shortfall of supply.

Yet that proclamation by China reflects bigger issues in the global market. It’s one reason that oil-consuming countries around the globe, including the U.S., are clamoring for more production from OPEC Plus. Last week OPEC plus Russia seemed to be reveling in the state of the global oil market and seemed to have no intention of changing its plan to add just 400,000 barrels of oil to the market. Their excuse for not wanting to deviate from that plan was the delta variant of covid 19. Yet that risk seems to have diminished from last month as more economies are reopening. Perhaps the real reason OPEC plus Russia wanted to stay the course is the revenue they are making. It is the only game in town in the U.S..

Then oil bounced back on reports that OPEC Plus may be giving into global pressure. Four OPEC unnamed sources suggested that the group may be considering more oil output. Reuters reported, “OPEC+ Russia is considering going beyond its existing deal to boost production by 400,000 barrels per day (bpd) when it meets next week. The Organization of the Petroleum Exporting Countries and allies led by Russia, known as OPEC+, meets on Monday to review output policy. In July, the group agreed to boost output by 400,000 bpd a month to phase out 5.8 million bpd in cuts.

Reuters said that “Four OPEC+ sources said producers were considering adding more than that deal envisaged, but none gave details on how much more, or when supply would increase. Another OPEC+ source suggested an increase of 800,000 bpd for one month was possible, with zero the next month.” If OPEC does 800,000 that will help because of natural gas and coal shortage the demand for liquids will rise by that much if not more. There are still some that believe that OPEC plus will not increase production. My thinking is if they’re hinting then they will. So don’t be shocked if that 800,000 barrel number is a real number.

Natural gas futures in the United States are torn between the shortages that are overseas versus the supply situation in the United States. U.S. supplies did improve from the five-year average but I don’t think anybody would say that natural gas supplies are abundant. We’ve seen some volatility in the market and the bearish case right now for natural gas is the fact that the weather forecast for most of October is going to be warmer than normal and that will put natural gas demand at a very low level as it will be too warm for heating demand and too cool for air conditioning demand. This should allow the U.S. to build inventories ahead of winter. Yet if you look at the big picture, supplies are still relatively tight and there is no room for error in this market. If the weather turns cold, we will see a substantial price spike.

The EIA said that, “Working gas in storage was 3,170 Bcf as of Friday, September 24, 2021, according to EIA estimates. This represents a net increase of 88 Bcf from the previous week. Stocks were 575 Bcf less than last year at this time and 213 Bcf below the five-year average of 3,383 Bcf. At 3,170 Bcf, the total working gas is within the five-year historical range.

For oil we’re kind of in a technical no-man’s-land. The trend is still decidedly up but short term we bounced off the upper Bolinger band and in the overbought territory. To keep the uptrend alive, we should stay above 7350 today. If we consolidate in this range, we should make a run for new highs here shortly but we may have to be patient because after all, it is still shoulder season.

Natural gas is going to come down to the weather. Any changes towards cooling or colder than normal and we’ll have to buckle up because it’s going to be an incredible ride. The propane situation looks bleak. It’s going to be hard to get supplies to where they need to be going into winter.

Gasoline and distillate should be bought on breaks as supplies are going to continue to be tight.

Thanks,
Phil Flynn

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