Gulf oil comeback

September 2, 2016 08:34 AM

Even before hurricane Hermine, the first hurricane to hit Florida shores in 11 years, went on land, gulf oil workers were already brining oil and gas production back online. The work that oil companies and oil workers do each day is amazing and a testament to the talent and fortitude of the American worker and something we should all take pride in.

As hurricane Hermine missed key production areas the Bureau of Safety and Environmental Enforcement (BSEE) reported that only 15.18% of the current oil production in the Gulf of Mexico has been shut-in. That is an improvement from about 22% from two days ago. As for natural gas, it was approximately 9.03% of gas production in the Gulf of Mexico has been shut-in, improved from 11% a few days ago.

Crude oil prices that were already under pressure, fell after these numbers were released. The hurricane Hermine threat now becomes more of a threat to demand than to supply even after it was downgraded to a tropical storm. But RBOB gasoline futures got hit the hardest in the futures trade as it is feared that hurricane Hermine may re-form along the East Coast of the country causing torrential rains and perhaps many power outages. Georgia, North and South Carolina are in the storm path. Close to 200,000 customers were without power in Florida, Georgia and North and South Carolina according to NBC, saying that the vast majority of the outages were in Florida, according to utility companies. Those outages may reduce natural gas demand.

There are also predictions that the storm may go out to sea and re-form and possibly threaten as far north as Massachusetts. Many folks that want to enjoy the Labor Day weekend at the beach will be thwarted by this storm and that will reduce gasoline demand.

Of course, with the big price break in oil and natural gas yesterday, perhaps we have already priced in some of that demand destruction and we may actually focus on other issues than the storm. The U.S. jobs report will be key especially after the pathetic U.S. ISM manufaruring data went into contraction at 49.4 in August after the dollar soared post Brexit. In the meantime, the UK blew away expectations and the break in the British Pound gave their manufacturers a big advantage. So if the Fed raises rates the dollar will rally pushing our manufactures deeper into contraction. So unless today’s jobs number is a spectacular blowout blockbuster, it may be hard for the Fed justifying burying U.S. manufacturers.

The other focus will be on the U.S. oil rig count. One reason the markets don’t have massive reactions to storms is because of the U.S. shale producer that makes us less dependent on Gulf of Mexico oil production. Expectations are that the rig count may rise. 

Reports from Bloomberg say that Russian President Vladimir Putin believes that they will have an agreement to freeze oil output with OPEC and that is also lending support. Putin says that Iran should get some latitude to bring production up. This is in contrast to comments from the Russian oil minister that said he sees no need for a production freeze with prices near $50.00 per barrel. Of course they are not near $50.00 now, are they?

For natural gas the loss of Gulf Supply is a big deal. While in the short term the market may fret about some demand destruction, yet in the big picture, supply versus the five-year average is tightening. Even after The Energy Information Administration reported that working gas in storage increased by a more than expected 51 bcf, the surplus on the five-year average fell to 10.9%. That is down from 54% to start the season. Looking ahead after the storm, demand looks to be above average for September and October based on long term weather models so we should see that surplus continue to erode. Supply was at 3,401 Bcf, stocks were 238 Bcf higher than last year at this time and 334 Bcf above the five-year average of 3,067 Bcf. At 3,401 Bcf, total working gas is above the five-year historical range. 

The Energy Information Administration also reports that U.S. nuclear power plant outages have been higher this summer (June through August), averaging 4.3 gigawatts (GW), or 51% more than in 2015. Summer outages were at their highest in June, reaching 9.9 GW, or about 10% of total U.S. nuclear capacity, on June 17 and averaging 6.2 GW for the month. Outages dropped to an average of 4.4 GW in July and 2.4 GW in August.

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.