Tropical storm adds to bullish crude outlook

August 21, 2012 04:51 AM

Number Nine, Number Nine

As if we did not have enough reasons for oil to rally, another has just developed and we'll call it Tropical Depression Number 9. A storm that has the possibility of ending up in the Gulf of Mexico can add support to a market that is finding more reasons to rally. Yesterday oil broke a bit on developments in the Eurozone as the Bundesbank tough talk ahead of the meeting was dampening hopes of a bond buying extravaganza. Oil was initially boosted by a report by German news magazine Der Spiegel who said that the ECB may set yield caps for countries in the EU. That would take a huge EU commitment and may cause commodities to sky rocket. Yet the Bundesbank also criticized the European Central Bank’s plan to embark on potentially “unlimited” government bond purchases. On top of that, we have geo-political storms brewing and extra volatility as we say good bye to the September crude contract.

Oil traders have come to realize that the Bundesbank always talks tough ahead of big meetings so that when they give a little, it looks to the market that they are giving a lot. Also the fact that the ECB denied the Der Spiegel report that the new ECB program will set yield caps. In response, the ECB issued a statement saying it is, “misleading to report on decisions which have not yet been taken.” So there! Of course setting yield caps could create commodity frenzy and would drive prices wildly higher.

Oil also is getting support from more talk of war. The Times of Israel reports that Israel’s Prime Minister Benjamin Netanyahu, “is determined to attack Iran before the U.S. elections,” Israel’s Channel 10 News claimed on Monday night, and Israel is now “closer than ever” to a strike designed to thwart Iran’s nuclear drive. In Syria, President Obama drew a line in the sand and warned that if there is any evidence that Syria’s chemical or biological weapons are being moved or used may force him to reconsider U.S. military action. The President said that, “A red line for us is we start seeing a whole bunch of chemical weapons moving around or being utilized, that would change my calculus.”

Of course all of this drama is not good for gas prices that have already had more bad luck than the Chicago Cubs. We have had refinery fires, pipeline leaks and now a gas recall in Indiana and according to Bloomberg and AAA, we are at a record high for this time of year in the U.S. after refinery breakdowns tightened supply. The $3.72-a-gallon average price of regular gasoline at U.S. retail stations is the highest for this day, and prices will likely continue breaking daily records for at least several more weeks, AAA said. Regular gasoline at the pump, averaged nationwide, about $3.72 for the past four days, according to data from the nation’s largest motoring organization. It’s the first time since April 23 that a national average in 2012 was the highest ever for the day, Michael Green, a spokesman for AAA in Washington, said in an e-mail. Prices reached a year-to-date high of $3.936 on April 4, before sliding 61¢ to $3.326 on July 1. Since then refinery shutdowns and stronger Brent crude oil boosted prices 39.4¢ to the highest level since May 16, AAA data show.

Yet that may not matter this Labor Day. Bloomberg News reports that the most Americans since 2008 will travel on vacation during the Labor Day weekend this year, as consumers grow more confident that conditions are improving in the world’s largest economy. The number of people taking trips of 50 miles or more will increase to 33 million from 32.1 million last year, the American Automobile Association, the biggest U.S. motoring organization, said in its annual forecast. That’s the most since a record 45.1 million travelers four years ago. This year the long weekend runs from Aug. 30 to Sept. 3.

The FT reports that Cnooc, China’s main offshore oil and gas producer, posted an unexpectedly large 19% drop in net profit in the first half of the year on higher costs and lower output caused partly by an oil spill. Most analysts had expected the state-controlled energy group would post a small profit fall in the first half. Its Hong Kong-listed shares fell 3% on Tuesday. The net profit drop comes at a sensitive time for Cnooc, which is in the midst of a bid to acquire Canadian oil company Nexen for $15.1 billion in a deal that, if completed, would be the largest ever offshore acquisition by a Chinese company. In announcing first-half results on Tuesday, Cnooc said it cut its interim dividend by 40% to HK$0.15 per share in order to save cash to pay for the Nexen deal, which still needs to be approved by the Canadian government.

The Chronicle is reporting that Mexico may someday realize its potential as a natural gas superpower, but in the lengthy meantime, the country’s gnawing energy craving may feed off Texas pipelines. Mexico energy planners are pressing ahead with an $8 billion expansion of the country’s 5,500-mile natural gas pipeline system, focusing on central and northern industrial cities. And for the foreseeable future, they intend to fuel that network with U.S. natural gas, including from South Texas and Eagle Ford Shale fields. “Mexico has a unique opportunity, we have access to the world’s cheapest gas,” Mexican Energy Minister Jordy Herrera said of the U.S. supply in announcing the new pipeline plans earlier this year. “This is competitiveness for the industry of our country.” The U.S. side of the project awaits regulatory approval.

About the Author

Phil Flynn is a senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. Phil 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.