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
It always matters which way the winds are blowing and Hurricane Idilia is now predicted to be a life-threatening storm and one that will cause oil, gas and natural gas demand destruction in Florida and potentially down the coasts of Georgia and the Carolinas. Fox Weather is reporting that, “Time is running out for Florida residents to prepare for the onslaught of Hurricane Idalia, which is expected to rapidly intensify into an ‘extremely dangerous’ major hurricane before making landfall along Florida’s Gulf Coast on Wednesday, according to the National Hurricane Center (NHC). Gov. Ron DeSantis held a news conference on Monday with other state leaders and said 46 counties are included in a state of emergency. However, DeSantis stressed that even if a county is not included in the state of emergency, residents need to prepare for possible major impacts from Idalia. Life-threatening storm surge and dangerous hurricane-force winds are expected for Florida residents as early as Tuesday, according to the NHC.”
The track of the storm and its potential impact on reducing demand in part helped diesel crack spreads come back after last week’s explosive run. Gasoline cracks that rose on reports of Marathon Louisiana refinery running at reduced rates eased back as we will see reduced Labor Day demand due to this storm and Hurricane Franklin. Well, hurricane Franklin is no threat to land in the US, according to the Fox Weather Channel. This storm, Hurricane Franklin, is creating life-threatening surf and rip currents are occurring along the coast of the Southeast U.S. according to the NHC. A Tropical Storm Watch is in effect for Bermuda, where tropical storm-force impacts could begin within 48 hours.
Yet even with the potential for some demand destruction, the coming crude oil supply squeeze is becoming more painfully obvious. Despite some headlines touting US oil record production and saying that Republicans are ignoring that fact, the reality is that the Biden war on US oil has taken its toll. Biden is not getting credit for efficiency by US producers, nor should he try to take credit for the gains of the US oil and gas industry that he unfairly slandered. The reality is that according to Reuters John Kemp, “US oil and gas drilling activity slowed for the eighth consecutive month in August in response to the fall in prices since the middle of 2022. The number of active rigs declined to an average of just 647 in August 2023 down from 780 in December 2022.”
So if, as Mr. Kemp points out, there is a lag time for drillers to respond to price then there is also a lag time to see production from investments in new oil production. In other words, those that say that oil production was up under Biden post Covid investment, it was the risk taking of oil and gas companies and investors that helped supply the globe. It was also the US refining industry that ran at a near record breaking pace to keep the market well supplied. Not bad for an Industry that Biden claimed were a bunch of war profiteers.
This comes as we expect to see more signs of the oil supply tightening in today’s American Petroleum Institute report. We’re expecting major draws in crude oil, as much as 4 million barrels. We also expect to see a big drop in distilling inventories of 3 million barrels as well as a drop of gasoline inventories by 2 million barrels.
We expect to see another substantial drawdown in the Cushing, OK delivery point, and we will see those supplies fall below 30 million barrels this week. Without the Strategic Petroleum Reserve to bail this market out and because of the lack of investment and demand response due to the market being manipulated by a release of SPR supplies, we’re going to be left empty handed.
Global supplies are tight even with Iran oil. As the Biden administration has allowed Iran to drain supplies from 93 million barrels of Iranian crude and condensate to close to 5 million barrels currently. That was a lot of cash into Iran pockets. And a lot of oil that ended up in China and India to mix in with our SPR oil.
Yet despite the risk of demand destruction, prices are creeping back up after pulling back a little bit in the gasoline and diesel market. AAA is reporting that regular gasoline prices are at $3.823 per gallon. That is up from $3819 a day ago but down from $385.4 a week ago. Diesel consumers are not as lucky. Diesel prices have hit $4.411 a gallon. That is up from $4.377 a gallon yesterday and up from $4.349 a week ago. The key for gasoline prices is just how bad this storm will impact what was expected to be a stellar Labor Day weekend demand scenario.
AAA predicted that Labor Day travel to be up 4% over last year domestically but it is a huge story if you look at the big picture and less likely to be impacted by the hurricanes. The International bookings for Labor Day weekend have spiked by a whopping 44% over 2022. That means a big surge in jet fuel demand. That is another reason diesel is strong. Yes, there are more persons per flight but that is still a bullish demand number. On top of that we are sharing the holiday with our neighbors to the north in Canada that will also celebrate a holiday on Sept 4th as well.
There are also reports that China is going to see a big surge in air travel. Bloomberg writes, “After years of pent-up demand for leisure and business travel due to the ravages of Covid-19, millions of Chinese are taking to the skies again as the nation leads an aviation boom across Asia.” While aviation fuel prices are nowhere near the highs of last year, they’ve jumped about 34% as compared with the start of July, trading above $119 a barrel in Singapore, according to Bloomberg Fair Value data.
Natural gas prices that have been on fire due to extremely hot temperatures. They are pulling back on the prospect of some demand destruction because of the storms. Still the expectation is with hot temperatures and with the lack of wind blowing in Texas, we could see another smaller than expected injection into supply next week. The US now is the world’s largest exporter of liquefied natural gas and this is going to be increasingly important in the years to come. It may also be important because of the potential of a strike. Bloomberg is reporting that, “Strikes at Chevron Corp.’s liquefied natural gas export plants in Australia could begin as soon as Sept. 7, threatening to disrupt global energy supply and sending fuel prices higher. Unions gave notice that industrial action at the Gorgon and Wheatstone export plants will begin if Chevron doesn’t reach an agreement with workers, the company said Monday in an emailed statement. Chevron said it will “continue to work through the bargaining process as we seek outcomes that are in the interests of both employees and the company.” The threat of strikes has roiled global gas markets since early August, when unions first voted for potential labor actions at three plants in Australia, and European prices jumped 10% Monday. The two Australian LNG plants operated by Chevron make up approximately 5% of global LNG supply.”
Stay tuned to Fox weather and Fox Business for storm updates.
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Senior Market Analyst & Author of The Energy Report
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