Crude price pullback and natural gas rally

August 23, 2016 08:18 AM
Daily Energy Market Analysis

Crude oil prices ended their best surge in 4 years in spectacular fashion as oil chose to focus on what seemed to be bearish fundamentals. The bear case yesterday was an agreement with Iraq and the Kurds, who would soon get oil flowing and a potential ceasefire in Nigeria.

As far as crude stocks go, in the United States anyway, there are signs that those inventories will continue to tighten. Genscape, the widely watched market intelligence firm, reported that Cushing, Okla., crude stocks fell by 187,000 barrels. If that is correct, it is likelier that we will see U.S. oil supply tighten more in tonight’s American Petroleum Institute report. We expect crude supply to be down 2.5 million barrels. Our call for Cushing was 700,000 barrels.

The other factor is the Fed. With a chorus of Fed officials like William Dudley and Fed Vice Chair Stanly Fisher trying to tell us that interest rate increases are on the table is enough to get the market shaken out of some of those longs. While the market is skeptical that the Fed will act, they still have to respect the comments even if they question the credibility of those comments.

Natural gas bounced on weather that is a bit more bullish. More heat means we will see an extension of below average inventories for injections. That means that natural gas is on track to squander the largest summertime supply surpluses in history. Is this an ominous sign about supply as we head into next winter?

We also have a lot of tropical activity in the Atlantic. Tropical Depression Fiona will miss the Gulf of Mexico and may scrape North Carolina. A new tropical storm Gaston looks like it is turning up the East Coast but could still be a threat to the Gulf of Mexico and another tropical wave storm that has a 60% chance to be named later, may cause havoc in the Gulf of Mexico but it is too early to tell for sure.

The National Hurricane Center says that they are issuing advisories on tropical depression Fiona, located several hundred miles north-northeast of the Leeward Islands, and on recently upgraded tropical storm Gaston, located about 450 miles west-southwest of the Cabo Verde Islands. A tropical wave located about 400 miles east-southeast of the Leeward Islands is producing widespread cloudiness and thunderstorms. Conditions are marginally conducive for gradual development while the disturbance moves west-northwestward to westward at 15 to 20 mph. Environmental conditions are expected to become more conducive for a tropical depression to form by late this week when the system is forecast to move near Hispaniola and Puerto Rico, and the southeastern and central Bahamas later this morning. Interests in the central and northern Lesser Antilles, the Virgin Islands, and Puerto Rico should monitor the progress of this system.

While natural gas production in the Gulf of Mexico is not as large as it once was, it is still very important. The UPI reports that, "The Gulf of Mexico has proven to be one of the world's most prolific hydrocarbon basins and is the primary offshore source of hydrocarbons for the United States," Mike Celata, a regional director for the Bureau of Ocean Management, said in a statement. The UPI reports that early all of the offshore oil and natural gas produced in the United States comes from the Gulf of Mexico and reserves account for 16 percent of the total oil and 4.5 percent of the total natural gas produced.

Eight fields started production in the Gulf of Mexico last year and four more are expected to enter into operations in 2016. A report from the U.S. Energy Information Administration found onshore declines should be offset by gains in the Gulf of Mexico due in part because the offshore areas are less sensitive to short-term volatility in crude oil prices. The federal report estimated output from the Gulf of Mexico will account for about 20 percent of total U.S. crude oil production by next year.

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