Is the energy complex ready to collapse?

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Oil (NYMEX:CLU13) bulls are losing hope as the energy complex looks price wise that it is ready to collapse. Can strong data from China help keep the petroleum market elevated? With U.S. gasoline production surging way ahead of demand and a tanking market it is possible that it will cause a major correction to petroleum. While the supply numbers in yesterday’s Energy Information Administration inventory report failed to surprise anyone, the strong refinery runs and product production has to weigh on price. Even with a soaring euro currency and a falling dollar, oil is barely hanging on.

Reuters news reported “ Surprisingly firm rebounds in China's exports and imports in July offered some hope that the world's second-largest economy might be stabilizing after more than two years of slowing growth, although an imminent rebound still looks unlikely.

“Imports of crude oil and iron ore rebounded from multi-month lows to record highs last month as more raw materials were shipped in to rebuild depleted stocks, and soybean purchases hit a record for the second straight month. A steadying of the economy would be a relief to China's leaders, who have scrambled to shore up growth since mid-year amid concerns a sharp slowdown could derail their attempts to reform the economy, so it was driven more by consumption than debt-funded investment and manufacturing. Data from the Customs Administration showed exports rose 5.1% in July from a year ago, a smart turnaround from their first fall in 17 months in June. Analysts had expected a 3% rise. Imports fared even better with a 10.9% jump from a year earlier, more than five times what analysts had forecast. The surprising strength in imports left China with a smaller-than-expected trade surplus of $17.8 billion.”  Yet oil is not overly impressed. While precious metals are getting support and copper is soaring near a two-month high, petroleum is struggling. Gasoline supply hit a 14-year high for this time of year after refiners expanded production capacity.

Barbara Powell of Bloomberg reported that “Gasoline’s decline coincides with a drop in 2013 Renewable Identification Numbers, or RINs, easing concern that higher costs to blend ethanol would curb fuel supply. RINs sank 17% to 74 cents today, the lowest level since April 29, data compiled by Bloomberg show. Refiners must buy the credits in lieu of blending ethanol into gasoline to meet federal rules. The Environmental Protection Agency gave refiners and blenders more time yesterday to meet the requirement and more flexibility in how they meet it.

Iraq reports that they plan to raise oil production by 360,000 barrels a day by the end of this year bring online oil fields in the southern part of the country.

Natural gas tanked as sharp drops in power generation were reported. Reuters reported that power production in the continental United States for the week ended Aug. 3 slid 10.8% from the same week in 2012 to 83,904 gigawatt hours (GWh), according to data released Wednesday by the Edison Electric Institute. Overall output fell for the second straight week and was down in all nine U.S. regions. The largest year-on-year percentage drop in output was in the West Central U.S., which tumbled 22.4 percent to 6,400 GWh, EEI said.

Short term glut but long term the picture brightens. Yesterday the Obama administration approved natural gas exports from a third U.S. facility. Reuters reported that the second permit issued in about three months, triggering debate over whether the review of a long backlog of export applications is picking up steam. The export terminal in Lake Charles, Louisiana, was given a conditional license from the Department of Energy to ship liquefied natural gas to all countries. The terminal is backed by BG Group Plc and Energy Transfer Partners LP's Southern Union Co. The department's order gives the Lake Charles terminal permission to export up to 2 billion cubic feet of natural gas a day for 20 years. The approval is contingent upon the Lake Charles terminal receiving a permit from the Federal Energy Regulatory Commission for construction of the facility.

The decision came nearly three months after Freeport LNG's Quintana Island, Texas, terminal got the go-ahead. This exceeded the eight-week wait that an Energy Department official recently suggested might be necessary between each of the nearly two dozen pending applications. But it still may set the stage for a more predictable review process going forward.

The UN is reporting that world food prices tumbled in 2% in July which makes the third month in a row that food prices fell. A break in grains, sugar and palm oil were credited with drop.

Oil bulls are losing hope as the energy complex looks price wise that it is ready to collapse. Can strong data from China help keep the petroleum market elevated?

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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