Energy report: Cost of spill will be long-term

A pain in the back end and other locations.

You may not pay today but we will pay tomorrow. Fears of that the oil slick will drive prices higher in the short run are being abated as evidenced by the front end selling off but it is in the back end of the curve where we may feel the pain.

While the contango (meaning that prices are lower in the front dated futures contracts vs. the longer dated contracts) has been wide for some time reflecting inflation fears and improving demand scenarios, yesterday's widening may be signaling fears of the long term political impacts of drilling expansion off shore. The spread widened significantly perhaps suggesting to some that drilling offshore will be restrained in the future leading to higher prices.

In the short run, the concerns about shipping and imports being impacted was causing greater concern. Last night the US Coast Guard had a meeting with port authorities about the risks involved allowing ships into ports and harbors after they have gone through the heart of the spill and the potential danger posed by the possibility of hazardous materials on their hulls. According to my source the Coast Guard says that at this time it is not expected to slow shipping because most ships that go through the heaviest part of the slick will sail through a couple of miles of clean water cleaning their hulls before they hit port. So unless the slick continues to get worse shipping is unlikely to be impacted.

What is impacting oil is soft manufacturing data out of China. Yesterday oil initially rallied in the United States when our ISM manufacturing number hit 60.4 the highest reading since June of 2004. Yet concerns about Greece and less fear that oil supplies will be impacted by the spill sent oil prices falling. Now China, the driver of global oil demand, is showing signs of exhaustion. According to reports China's manufacturing sector expansion was surprisingly slow in April, with weaker growth in output and new businesses, a survey published by Markit Economics showed .The HSBC/Market manufacturing Purchasing Managers' Index fell to a six-month low of 55.4 in April from 57 in March. However, the index stayed above the neutral 50 threshold in April, pointing to further improvement in manufacturing sector operation. This news comes a day after China raised reserve requirements on some banks. If China starts to slow then it is possible that oil has a much farther way to fall.

Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at pflynn@pfgbest.com.

About the Author
Phil Flynn

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.

 

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