Projected oil demand downgraded on weak economy

Stormy Weather!

I don't know why crude went to the sky, stormy weather? Well part of it was stormy weather, but part of it was clearing economic skies. The oil market was helped by the global stock market rebound. That of course is not to say that weather isn't on traders' minds. We saw some of the impact from hurricane Irene and the beginning of tropical storm Lee in last night's American Petroleum Institute supply report as they reported a whopping 2.97 million barrel drop in supply. At the same time gas fell only 871,000 barrels as motorists quickly filled up before the storms and a shutdown of business and manufacturing led to a gigantic 3.95 million barrel build in distillate supply. Today we get the version from the Energy Information Agency which was of course delayed by one day due to the Labor Day holiday.

Still, while oil basks in the improving economic data and worries about some upcoming storms, we did get some good news on the Gulf of Mexico production front that is still struggling to improve after tropical storm Lee. The Bureau of Ocean Management said that based on operator reports that approximately 36.9 percent of the current oil production in the Gulf of Mexico has been shut-in and approximately 18.1 percent of the natural gas production. That was a big improvement over the day before, but how long can they stay there with the challenging weather issues down in the Gulf of Mexico?

The Gulf could be threatened by two tropical storms, not the one storm that was reported. There is tropical storm Nate in the Bay of Campeche and tropical storm Maria that some private weather forecasters are predicting could become a major hurricane in the Gulf. Now the National Hurricane Center seems to be tracking this storm up the East Coast but if that changes and the NHC joins some of these private forecasts for a Gulf entry, we better get prepared for a big time price spike.

The Energy Information Agency is the latest agency to downgrade expectations for oil demand and this is something I thought would happen. Earlier this year I said many were overestimating demand and sadly I was right. The EIA in their Short Term Energy Outlook reports that, "EIA's economic growth assumptions have been lowered substantially compared with last month's Outlook. This forecast assumes that U.S. real gross domestic product (GDP) grows by 1.5 percent this year and 1.9 percent next year compared with 2.4 percent and 2.6 percent, respectively, in the previous Outlook. World oil-consumption-weighted real GDP grows by 3.1 percent and 3.8 percent in 2011 and 2012, respectively, compared with 3.4 percent and 4.1 percent in the last Outlook. With weaker economic growth and lower petroleum consumption growth, EIA expects the U.S. average refiner acquisition cost of crude oil to rise from an average of $100 per barrel in 2011 to $103 per barrel in 2012, compared with an increase to $107 per barrel in 2012 in last month's Outlook. Regular-grade gasoline retail prices fell by 40 cents per gallon from their peak this year of $3.97 per gallon on May 9 to $3.57 per gallon on June 27 following a decline in crude oil prices. Gasoline retail prices stabilized in July and August with weekly retail prices averaging between $3.58 per gallon and $3.71 per gallon, but are projected to fall to an average $3.47 per gallon in the fourth quarter 2011 after refiners switch production from summer-grade gasoline to lower-cost winter-grade gasoline. Natural gas working inventories ended August 2011 at 3.0 trillion cubic feet (Tcf), about 5 percent, or 144 billion cubic feet (Bcf), below the 2010 end-of-August level. EIA expects that working natural gas inventories will approach last year's high levels by the end of this year's injection season. The projected Henry Hub natural gas spot price averages $4.20 per million British thermal units (MMBtu) in 2011, $0.18 per MMBtu lower than the 2010 average. EIA expects the natural gas market to tighten moderately in 2012, with the Henry Hub spot price increasing to an average of $4.30 per MMBtu. Global coal supply disruptions, particularly in Australia, and growing demand in China have helped boost U.S. coal exports for the first half of 2011 to a 29-year high of 54 million short tons (MMst), an increase of 35 percent compared to the same period in 2010 and double 2009 levels. EIA expects coal exports to begin to weaken, totaling 45 MMst over the second half of 2011 and 87 MMst in 2012."

The International Energy Agency seems to have a bright new leader! Reuters News reported, "Maria van der Hoeven, a former Dutch Economy Minister who started at the IEA on September 1, also said the agency's release of oil from its emergency reserves in June was a success and there was no plan for a further move. “It is an answer to a supply disruption and it ought to be an answer to a supply disruption," Van der Hoeven told Reuters in an interview, referring to the purpose of the IEA reserves, adding they should not be used to lower oil prices...The IEA's 28 members are required to hold stocks equal to 90 days of their consumption. Its decision in June to release 60 million barrels, in the wake of the loss of Libya's oil exports due to civil war, was the third in the agency's 37-year history...."You do it for the right reason, and the right reason is always to have a solution for a disruption of supply," van der Hoeven said in an interview in her office at the IEA's headquarters overlooking the landmark Eiffel Tower in the French capital. "That's what it's intended to be." She dismissed a widespread perception at the time of the IEA release that the agency had acted to protect industrialized countries from rising oil prices, saying a change of remit had not occurred. "I wasn't there when the debate was going on, but definitely not," she said." A must read on your Reuters app!

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.

 

Futures and options trading involves substantial risk of loss and may not be suitable for everyone. The information presented by The PRICE Futures Group is from sources believed to be reliable and all information reported is subject to change without notice.


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