Storm Out Front. The Energy Report 08/21/2023

Oil prices are rising as a global supply squeeze seems to be offsetting concerns about China and their less than expected rate cut to shore off what some say is their cratering economy. Yet the biggest challenge for oil may come in the form of storms in the Atlantic, that according to Fox Weathers Amy Freeze quoting Michael Lowry who says that, “For only the third time on record (since 1851), 3 Atlantic tropical cyclones formed over 24 short hours (TD6, Emily, Franklin). The historic tropical cyclone outbreak this weekend was matched only by August 22, 1995, and August 15, 1893. Amy Freeze says that if you extend that to 25 hours you could add Tropical Storm Gert. This record-breaking outbreak could have  bearish or bullish consequences for oil depending on how they play out. But beyond the storm, the outlook for oil is extremely bullish.

We will see the impact of the supply deficit as we should see another substantial drawdown in the US crude oil supply. We are looking for at least a 3-million-barrel crude oil supply drop and a corresponding drop in both gasoline and distillate. Refiners will continue to respond to solid crack spreads and will try to inch up what has been near record breaking use of refining capacity.

The oil bears continue to bet that the Chinese economy will bring down the entire global oil market, yet as China fails to cut rates as aggressively as some thought they might, is it possible that China is less worried about that than the oil bears? The Wall Street Journal says that, “The one-year loan prime rate was lowered by 0.1 percentage point to 3.45% while the five-year rate was kept unchanged at 4.2%, the People’s Bank of China said on Monday. The rate reduction, the second this year after a cut in June, was smaller than many in the market had expected after the PBOC last week cut the interest rate on its one-year medium-term lending facility by 0.15 percentage point, to 2.5%. Loan prime rates are set by a panel of banks and show rates they offer to some borrowers for corporate loans and mortgages. When the central bank changes the medium-term rate, banks tend to follow similar changes to loan prime rates.

The decision by Chinese banks to keep the five-year rate steady came as a surprise to many economists. They had expected a cut of 0.15 percentage point for both rates. In June, average mortgage rates had slipped below the benchmark, falling to 4.19%, said the PBOC. Rates for corporate loans and personal housing loans sank to record lows.

Yet copper seems to be rising off the news, a bell weather for Chinese economic concerns, and grains as well but perhaps more from the heat than the realization that China is going to have to come to us for food at some point. Yet the move by China to show restraint is being taken as risk on for commodities.

US tensions are rising with Iran despite Biden’s push to work with them. The US and ships in the Strait of Hormuz to offset threats by Iran to seize tankers. Iran today is lashing out at that move calling it a provocative act. In the mean time, China is feasting on Iranian oil as Iran has supplanted Saudi Arabia as their top OPEC provider.

Today Reuters reports that, “A cargo of Iranian crude oil that was seized by the United States was unloading on Sunday after waiting two-and-a-half months off the coast of Texas to discharge, ship tracking data showed. Suez Rajan, a Marshall Islands-flagged tanker, has been anchored off Galveston, about 50 miles (80 km) outside of Houston, since May 30, unable to unload because commercial agents fear any vessel that takes it will be shunned by customers.” Iran is screaming foul. Bloomberg is reporting, “Russia’s oil-product exports have fallen this month as local refining activity eased, at a time when some fuels exceeded Group of Seven price caps to potentially increase scrutiny on Western shipping service providers to move cargoes. Shipments of Russia’s main products — including diesel, fuel oil and naphtha — dropped in the first 12 days of August, according to Vortexa Ltd. data compiled by Bloomberg. Most of those have breached price thresholds imposed by the G-7, complicating traders’ access to shipping logistics services and insurance.”

Oil products remain tight. Refiners can’t afford any down time due to the storms. We see upside risks and continue to be hedged rather than sorry.

The storm is also boosting natural gas that is already getting boosted by hot weather.

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Phil Flynn

Senior Market Analyst & Author of The Energy Report

Contributor to FOX Business Network

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