You have got trouble

September 18, 2017 08:46 AM

Hurricane activity and a big drop in U.S. rig counts will force traders to look at forces that may hit both supply and demand. Hurricane Jose threatens the East Coast from Delaware to Massachusetts, mainly demand but some refineries. Hurricane Maria also poses a threat to the Virgin Islands and is a dangerous storm as it is following the same path as Hurricane Irma and tropical storm Lee right behind that. From the larger energy picture, a big drop in U.S. rig counts shows that U.S. shale producers are pulling back and the International Energy Agency is warning about the underinvestment in oil production that may lead to future shortages.

The number of active oil and gas rigs in the United States are starting to plunge as we predicted would happen. Sub $50 a barrel oil has taken its toll on cash-strapped shale producers and this week the U.S. rig count fell by 8 rigs. The total oil and gas rig count is 936 rigs, up 430 rigs from the last prior, the number of oil rigs fell 7 and gas rigs by 1. While that's at 749 rigs up 333 from a year ago, we are seeing a significant slowdown in the second quarter and now rigs are falling in the third quarter and unless we see a significant increase in the price of oil, the U.S. rig count has peaked and will continue to decline.

This comes as the International Energy Agency continues to warn about underinvestment in conventional energy projects. While they said they failed to foresee "technical ingenuity" of U.S. shale production, they still see that a significant underinvestment in traditional projects that could lead to shortages in just a few years. 

We have seen some real strength in heating oil and ultra-low sulfur diesel as hurricanes have taken its toll on supply. Reuters points out that since 2000, between June and September, distillate inventories have risen by an average of 10 %, but this year they fell by 2.2 %, the first decline since 1982 when record-keeping began. Inventories typically remain flat or rise modestly through September, and while some refiners delayed scheduled work, the loss of the Gulf has hit overall U.S. refining. Because of Harvey, distillate stocks fell another 4.6 million barrels in the first two weeks of September, EIA data shows. U.S. distillate stocks are now at three-year lows for this time of year, and 5.2 % below their historical average.

Hurricane Jose should be mainly a threat to demand but there are some refineries that must be on guard. The Delaware City Refinery (PBF Energy), Delaware City 190,000 bbl/d (30,000 m3/d) and in New Jersey Bayway Refinery (Phillips 66), Linden 230,000 bbl/d (37,000 m3/d) Eagle Point Refinery (Sunoco), Westville closed 2010- 145,000 bbl/d (23,100 m3/d) Paulsboro Asphalt Refinery Paulsboro [30] 51,000 bbl/d (8,100 m3/d) Paulsboro Refinery (PBF Energy Corporation), Paulsboro 180,000 bbl/d (29,000 m3/d)Perth Amboy Refinery (Chevron), Perth Amboy (closed 2006) 80,000 bbl/d (13,000 m3/d) Port Reading Refinery (Hess), Port Reading (closed 2013) 70,000 bbl/d (11,000 m3/d).

Strong power demand in the Midwest all week will support natural gas. 

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.