Oil torn after China manufacturing miss

Manufacturing Madness

Oil (NYMEX:CLU13) is torn this morning as we await the Energy Information Administration data today. Last night we saw data from China that disappointed, yet from Europe it seems things are getting better. At the same time you have a storm in the Atlantic that looks like it could be a problem for oil and natural gas transport and production next week.

Yesterday it was more immediate threats that brought oil and products back from an early sell off. First it was when Reuters reported “BP Plc's Thunder Horse oil production platform in the Gulf of Mexico has shut while work is done on a natural gas processing system, traders and brokers said on Monday. The 250,000 barrel-per-day (bpd) platform shut because Destin Pipeline Co LLC on Sunday declared force majeure on an offshore portion of its natural gas pipeline system and said it would not be able to provide service through its processing plant in Pascagoula, Mississippi, the sources said. Destin said in a website posting the event could last up to seven days. The Thunder Horse platform also produces 200 million cubic feet per day of natural gas. The Destin gas pipeline system is majority owned by BP Plc's Amoco Destin Pipeline Co, with Enbridge Inc's Enbridge Offshore owning a 33% stake.  BP was not immediately able to respond to calls and emails requesting comment.” Reuters said that “The lack of trades last week for Thunder Horse crude and the wide gap between bids at $5.00 over the U.S. futures benchmark and offers from sellers at $6.00 over, had traders and brokers speculating that the platform was shut or curbing production.”

Then another mishap in the Gulf when Alison Sider reported “A drilling rig in the Gulf of Mexico was evacuated Tuesday morning after a natural-gas well blew out in shallow water off Grand Isle, La., federal regulators said. Natural gas was leaking from the well, leading to a film on the water, but it was dissipating quickly, according to the Bureau of Safety and Environmental Enforcement.  Walter Oil & Gas Corp., a private company based in Houston, reported the accident about 55 miles offshore, according to the U.S. Coast Guard and BSEE Hercules Offshore, the Houston-based company that owned and operated the jackup rig, said it was working with Walter "to mobilize the necessary resources to regain control of the well and minimize any potential impact on the environment." All personnel were safely evacuated, the company said. Walter did not immediately respond to requests for comment.”

While the market seemed to price these events in quickly the market is mixed on how to react to conflicting data overnight. HSBC Holdings Plc and Markit Economics reported that China’s manufacturing fell to a disappointing 47.7 reading that missed market expectations. This come a day after Chinese Premier Li Keqiang was quoted as saying that the "bottom line for economic growth is 7%."  A bad number may be good because it should increase the chance for Chinese stimulus.

What may also soften the blow is strong data out of Europe. French manufacturing data came in at 49.8, which was the highest level in 18 months and just a smidge below the expansion point. That helped the EU July Markit Manufacturing PMI rises to 50.1 from Jun 48.8 and Services PMI grows to 49.6 from 48.3.  A rebound in Europe should help China going forward and should increase oil demand expectations.

Yet oil has already had quite a run and despite the good news we are still looking very heavy. The market was ready to break but the Gulf platform issues brought us back.  Tropical Depression Number Four also look to be on a dangerous track. The National Hurricane Center says that Tropical Depression Number Four has formed in the far eastern Atlantic just off the coast of Africa and is expected to strengthen slowly as the environment is not too favorable for quick development.  If the storm strengthens it would turn into the next named storm, Dorian.  It is unknown if the weather system will survive slightly cooler waters and wind shear it is likely to encounter during the next couple of days. Yet if it does, the Gulf of Mexico could be its destination at least according to some private forecasters, but it is too early to really tell.

Gas prices have been going up in part because of broken legislation. Dow Jones reports that “Valero says its cost to comply with a federal renewable-fuel mandate more than doubled in 2Q to $125M. Refiners have to blend an increasing amount of ethanol into their gasoline, but the volume requirement has risen higher than U.S. drivers are able to consume, meaning refiners have to pay for the credits necessary to make up the difference. For the year, VLO expects to pay up to $800M for the credits, which would be higher than 2012.”

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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