Oil (NYMEX:CLX13) is getting that sinking feeling once again. Oil prices struggled in the backdrop of political gridlock and the ignominy of having our national panda camera shut down. My goodness, is this a third world country or what? Yet one might ponder whether oil and products would have been lower government shutdown or not.
It is clear from the American Petroleum Institute report that shoulder season is upon us. U.S. refiners that had been producing gas and distillate at a record pace are now slowing down a bit for seasonal maintenance. The API reported that refinery runs fell below 90% for the first time in recent memory coming in at 89.5% and down 1.5% from last week. This slowdown in runs led to a surge in crude supply as the API posted a 4.5 million barrel increase.
Yet despite the drop in runs and the increase in oil supply, gasoline supply still increased by 3.3 million barrels — a sign that gas demand is not very strong. On top of that, the fact that European refiners will be able to get their hands on Libyan and Nigerian crude when they come out of maintenance means they will have less use for U.S. gasoline and in fact will want to send some our way.
Distillate stocks fell as U.S. farmers start topping off the tank of their combines as the harvest in the U.S. will soon be getting underway. Based on my tour of fields in Iowa, Illinois and Wisconsin, the majority of the harvesting is ahead of us as we are a bit behind normal. Look for demand to be very strong over the coming weeks.
At the same time option players seem to be preparing for a potential meltdown of the crude complex. Bloomberg News reports that "Crude oil volatility declined as futures fell on the first day of a partial government shutdown that threatened the economic recovery and fuel demand. Implied volatility for at-the-money November options, a measure of expected futures swings and a key gauge of value, fell to 21.02% on the New York Mercantile Exchange from 21.51% yesterday."
And oh yes, the current fiscal year expired at midnight and Congress hasn't passed a spending bill for fiscal 2014! More fun to come!
Speaking of that! The Energy Report has been front and foremost in telling you how the shale gas revolution is changing our energy world. Well in another must read in today's Wall Street Journal, "The U.S. boom in natural-gas (NYMEX:NGX13) production is luring investment from foreign manufacturers eager to tap a cheap, abundant supply of fuel and feedstocks."
Companies from the U.S. and abroad have invested or are planning to invest billions of dollars through the rest of the decade in plants that would churn out chemicals, fertilizers, plastics, metals and fuel from gas. Many foreign companies, alone or in joint ventures with U.S. partners, are taking advantage of gas that costs a fraction of what it does in Europe or Asia to expand production in the U.S. Boston Consulting Group estimates that international companies will invest at least $50 billion through the end of the decade on projects that take advantage of low-price natural gas. Linde AG, a German gas-and-engineering company, recently said it would spend $200 million to build a new air-separation unit in La Porte, Texas, that would provide synthetic gas for the petrochemical industry. The investment "is directly tied to the price and availability of natural gas," said spokesman Uwe Wolfinger. "Five or seven years ago, this type of investment would have been far more likely elsewhere in the world."
The U.S. gas bonanza, fueled by the widespread adoption of new drilling techniques such as hydraulic fracturing, has already given a boost to domestic manufacturers. When natural-gas prices were high a decade ago—about twice as high as they are today—Dow Chemical Co. invested in new petrochemical facilities in the Middle East, where energy was less expensive. Today, Dow and other energy-intensive firms are investing heavily in the U.S.