The Phil Flynn Energy Report
Battling Back
Oil prices and the oil industry are battling back from severe challenges, whether it be the aftermath of Hurricane Ida or macroeconomic fears created by the Evergrande crisis in China. The markets are feeling a bit better after Evergrande Group paid interest on one of its bonds, but few believe that this drama is over.
Traders are starting to realize that a quick return to normal for oil and gas production from the Gulf of Mexico is going to be put off for some time. Thanks to major damage to Shell’s Mars and Olympus platforms, we can expect to see production stay down well into the new year.
Yesterday, the Bureau of Safety and Environmental Enforcement (BSEE) reported that 16.64% of Gulf of Mexico oil production is still shut in, which is the equivalent to some 320,909 barrels per day (bpd). The BSEE also reports that natural gas production still has 25.42% of gulf production shut in; that's the equivalent of 566.67 MMCFD. That lack of production is going to lead to a dangerous situation where crude and natural gas supplies will still be falling at a time when demand rises again this winter.
The impact of Hurricane Ida and relatively strong U.S. demand showed up in yesterday's American Petroleum Institute (API) report data. The API reported a 6.108 million barrel drop in crude oil supply, along with a 2.720 million barrel drop in distillate supply. Distillate supplies are going to become more critical as we get into winter. Natural gas prices are high and countries will be looking for other fuels to stay warm.
The only slightly price negative item in the report was gasoline supplies. Most were expecting to see a bigger draw in gasoline supplies because of refinery outages, but the number was lower than expected. The big draws in gas and crude oil supply suggest that the refineries aren't coming back online as quickly as some people thought, or at least it's not showing up in this week's report.
While the crude oil market is very bullish, we’re still going to face stiff upper resistance at 7260. Oil traders also must be aware of the Federal Reserve announcement today and the Jerome Powell press conference. Both could create some volatility for the underlying fundamentals for the oil market. Oil products also remain very bullish, but we’re still in shoulder season despite the strength that we're seeing in the market. Look to buy brakes. We also continue warning you to be hedged as we have significant upside risks in this market.
Some people are concerned that the pullback that we've seen in natural gas prices means that the crisis for natural gas is over. I say we’re far from it. We still have major issues on the supply side going into winter. You still have to be hedged for a potential spike this winter. Concerns in the short term may be overplayed a bit because we’re in a period of relatively weak demand. However, those fears could become reality when winter comes around.
EBW Analytics says:
October natural gas contract’s rapid descent is mirroring its meteoric rise. The front-month is down 84.5¢ from last week’s intraday high—returning 47% of the prior month’s gain—with the technical outlook suggesting more declines ahead. Strong production nominations, a downturn in LNG feedgas, and bearish weather may further ease the path lower for natural gas in the near term.
Natural gas fundamental shifts over the past week, however, have only mildly softened the chance for extreme bullish natural gas price scenarios this winter. Dramatic price results are largely technically driven, but early heating season weather will prove crucial. Price volatility may soften but is likely to remain high with natural gas fundamentals extremely price-inelastic in the short term. If the currently bearish weather forecast for October begins to shift in a colder direction, natural gas futures could quickly regain last week’s upward momentum.
Don’t miss out on my wildly popular trade levels on all major markets, as well as special subscriber-only updates. Call me at 888-264-5665 or email me at pflynn@pricegroup.com.