The dwindling Cushing cushion

October 24, 2016 02:01 PM

While the crude oil market fluctuates on OPEC posturing, supplies in Cushing, Okla., are falling. Not only did the private crude forecaster Genscape report a million barrel drop last week, a pipeline spill in a pipeline going in and out of the all-important delivery point will further reduce supply.

After dropping hard on comments Iraq's oil minister Jabar Ali al-Luaibi made that somehow he thinks Iraq should be exempt from production cuts, reports of the supply drop in Cushing as well as the reports about a pipeline spill, put the bulls back in control. Enbridge’s Seaway Legacy Pipeline, as well as the Seaway Twin line, were shut reducing supply by 850,00 barrels a day. It was reported overnight that the Twin line pipeline is back in operation but the legacy line is not. So there will be future drops in supply in Cushing next week as well.

The OPEC secretary general Mohammed Barkindo will meet with Iraq’s prime minister Ali al-Luaibi and try to get him back on board with a production freeze. He will more than likely get back on board after allowing Iraq to increase their output quota to about 4.75 million barrels of day. Currently they are producing at 4.43 million barrels of oil a day. This should get Iraq back on line with a cut and I am thinking there will be some type of announcement of that today.

Distillates also came back strongly on a refinery glitch in Texas. The coker that went off line came back up so the concern about a furthering tightening in supply should be limited.

Bloomberg News is reporting that the oil price rally is coming too late to save some of the most troubled oil services companies. Basic Energy Services Inc., which has been working with creditors to align its debt burden with depressed energy prices, said it will file for bankruptcy by Oct. 25. The move would come just a day after Key Energy Services Inc. filed for bankruptcy protection. Bloomberg reports that at least 100 North American oilfield services companies have gone bankrupt in 2015 and 2016 as energy prices slid. Debt burdens taken on when oil topped $100 a barrel earlier in the decade are proving unmanageable now that prices are at about half that level, even after this year’s 35% rally.

With the upcoming election, many politicians think we should be more like Europe when it comes to our energy policy. The U.S. Chamber of Commerce Institute for 21st Century Energy is warning that that could be a disaster. They say that, “With some politicians and interest groups heralding Europe’s energy policies as a model to follow, the U.S. Chamber’s Institute for 21st Century Energy examined what would happen if the United States was forced to pay European Union energy prices.

In the report, the Institute examined the policies and regulations that have led to much higher prices for energy in the Europe Union. The report found that European energy policies and prices would impose a $676 billion drag on the U.S. residential sector, with the average American household seeing price increases of $4,800 per year for their energy. This increase in prices would lead to the elimination of 7.7 million jobs in the United States.

The Energy Institute’s report identifies four key factors that make energy more costly in the European Union: 1) restrictions that inhibit access to low-cost, existing electricity supply and oil and natural gas supplies; 2) more generous subsidies provided by EU members for uneconomic technologies; 3) EU policies that place a tax on carbon emissions and 4) much higher taxes on energy consumption. These factors have driven EU prices over the past several years to rates that are 1.6 to 2.4 times greater than U.S. prices per unit of energy consumed. So a clean energy future should be good but you better be prepared to pay through the nose for it. Happy voting!

Natural gas took a hit as weather forecasts are mild and will allow supply to catch up. Still use the weakness in the market to put on long term bullish positions as this winter we should see prices move higher.

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.