The Phil Flynn Energy Report
Macroeconomic fears have overcome concerns about a supply shortage, at least for yesterday, and oil prices were hit hard on stormy seas. Macro worries about fallout from a possible default in China, fears that the U.S. might not raise the debt ceiling, and uncertainty about the upcoming Fed meeting caused Monday's meltdown. Yet, it's almost becoming cliche that after a hard selloff on Monday, we can expect to have a rebound on “turn-around Tuesday.”
Oil prices are trying to bounce back after being under pressure due to concerns regarding China's economy and the possible default of China’s biggest property developer. The development company, Evergrande, has $300 billion in debt and is due to pay out interest worth $83 million on a 5-year U.S. Dollar denominated bond, with an initial issue size of around $2 billion.
There are fears of a possible default, especially if the Chinese government fails to bail them out. Those concerns had people running for safe haven protection in the Dollar, which put downward pressure on a lot of commodities.
Many believe that China will step in and try to buffer the situation to avoid a larger fallout from a default. That said, S&P Global Ratings isn't so sure— China hasn’t made it clear whether or not they’re going to step up to avoid the default. There’s been a lot of planning surrounding this possibility for some time. Chinese key stocks are holding value, so there is a sense that this won’t be a “Lehman moment.”
The potential fallout for the rest of the Chinese economy has overshadowed the possibility of energy shortages in Europe and Asia, and maybe even here in the United States. Reports that U.S. oil and gas production in the Gulf of Mexico may be down longer than anyone had anticipated could raise some real concerns about supply shortages in the future.
Royal Dutch Shell (RDSa.L), the largest U.S. Gulf of Mexico oil producer, said damage to offshore transfer facilities from Hurricane Ida will cut production into early next year, slashing deliveries of a type of crude oil prized by refiners.
Shell was the hardest-hit producer from Ida, which tore through the U.S. Gulf of Mexico last month and removed 28 million barrels from the market. The ongoing disruptions have hampered exports and raised crude prices, as Asian buyers searched for substitutes for the popular Gulf Mars grade.
Three weeks after the storm, about 40% of Shell's production from the offshore region is still offline. Shell is the largest U.S. Gulf producer with eight facilities pumping about 476,000 bpd, according to researcher Rystad Energy. Overall, the U.S. Gulf produces 1.8 million bpd, or about 16% of U.S. oil output.
For the crude oil and natural gas markets, unless we see a major market melt down or a major rally in the U.S. Dollar, this weakness should be an opportunity to lock in prices for the winter months. We've been warning about the upside risk in both oil and natural gas prices and we still believe it’s going to be a problem going into winter. There’s the potential for sharply higher prices, especially if we get a cold winter. Don't make the same mistake that Europe did: be prepared.
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