Crude: Down for Christmas

December 12, 2017 08:35 AM
Daily Energy Market Analysis

The forties is down till Christmas, in the old North Sea, it will slow that oil flows into Scotland’s refineries. Christmas will find price hikes, all the way downstream. The forties is down until Christmas and the oil price will scream.

Ho Ho Ho. A shut down of the major Forties pipeline, a major artery in the global oil market, caused a spike in the dated Brent market and is supporting oil products around the globe. The shut-down should go to at least Christmas and maybe even longer.  A detected crack in the pipeline led to a total shutdown of the system for the first time in at least 7 years. This is going to further tighten an already tight dated Brent market that was supported by OPEC production cuts and surging European and Asian oil demand.

The pipeline system transports more than 40 % of the UK's North Sea oil production leaving that market in a deep hole. This oil can’t be easily replaced as other sweet oil producers are near their limits. Shale oil in the U.S. may help, but the producers can’t quickly ramp up supply nor can they move the oil fast enough to alleviate the shortage. The reverberations of this outage will be felt at first in Asia and Europe, but it will have ramifications for oil product prices around the globe.

If this was not enough, reports of an explosion in Austria’s largest import hub for natural gas sent UK gas surging to the upside. Reports say that The Baumgartner facility, had an explosion and fire around 7:45amLondon time and it is said to be an accident and not terror-related. Same-day gas prices in the UK rose 40 % to 95 pence per therm, the highest since 2013 according to reports.

U.S. WTI prices are rising and a report by Genscape that said that U.S. crude supply in Cushing Oklahoma dropped by a massive Cushing inventory -3.1 million barrels. Keystone pipeline issues and record refinery runs are going to add to the momentum.

For products, this means higher prices. Gas oil will soar as the supply of gas oil is below average for this time of year raising fears of shortages this winter. The pipeline outage has had issues for producers as well. Bloomberg says that the unplanned shutdown prompted Serica Energy Plc to cut its output guidance for the year, sending its shares tumbling by as much as 10 % in London trading on Tuesday. Explorers EnQuest Plc and Premier Oil Plc also initially declined, before rebounding.  

The UK link handles supplies from over 80 fields, and the shutdown forced Apache Corp. to suspend operations at its nearby Forties asset. Pipeline operator Ineos Group Ltd. said it will know in the "next few days" whether the system will be closed for two or three weeks, after declaring a "force majeure situation."

 So this raises the stakes for economies around the globe. With a hot 3.1% inflation rate in the UK the coming oil price spike may force them to look to raise interest rates. Other countries now have to brace for the impact of a potential oil price spike! Oh, Shale! Save me now! 

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.