The Phil Flynn Energy Report
Today, like many Americans, I feel anger, sorrow, and pain over the deaths of 13 American servicemen and the many innocent men, women and children of Afghanistan who were killed or injured by the bomb blast yesterday. Right now, it would be so easy to lash out and assign blame, but today is not that day.
Today should be a day of prayer; prayer for the families of those who lost their lives and prayers of protection for those who are still in harm’s way. Please pray that we can get the rest of the Americans and the Afghans who helped us out of there safely with no more lives lost.
We should also pray for protection from what could be a devastating hurricane, with the possibility to be on the same track as hurricane Katrina. Tropical storm Ida has the potential to become a major hurricane, with some estimates calling for a category 3 storm.
Oil platforms are already shutting down. Reports are stating that BP evacuated 4 oil production platforms and shut down U.S. Gulf of Mexico production. The storm will also slow down petroleum and natural gas exports and imports. Gulf of Mexico offshore wells account for 17% of U.S. crude oil production and 5% of dry natural gas production; over 45% of total U.S. refining capacity is along the Gulf Coast.
For the crude oil market, there’s still significant upside risk going into winter. The market, of course, is also going to focus today on what comes out of the meeting at the Jackson Hole Symposium. More Fed officials are calling for a taper, perhaps as early as October, which should give the U.S. Dollar more strength.
This could also cause a headwind for oil prices. Still, our expectation is that OPEC+ will pause their production increase next week due to concerns about the Delta variant of Covid-19 and, because of that, we still believe the market is going to be undersupplied going into the end of the year.
Right now, product demand for gasoline and diesel is exceptionally strong. This may be one of the reasons the Fed believes they'll have to start removing some of the extraordinary stimulus they've pumped into the system. Inflation fears are becoming real for the Fed and with more government spending coming, they might want to put on the brakes.
With hurricanes, you never really know how they're going to play out. Sometimes they do more damage to the supply side and sometimes they do more damage to the demand side, so we expect some volatility. If we do get a post-hurricane selloff, use that opportunity to lock in your hedges going into winter. It may be your last best chance before this market takes off.
The natural gas chickens came home to roost, whatever that means. The underlying bullish fundamentals played out in epic fashion after the Energy Information’s Administration (EIA) released an almost disturbingly bullish report, raising fears about the adequacy of supplies going into winter. It didn’t help that the market is also coming to grips with more production getting shut down in the Gulf of Mexico.
The EIA reports that “working gas in storage was 2,851 Bcf as of Friday, August 20, 2021, according to EIA estimates. This represents a net increase of 29 Bcf from the previous week. Stocks were 563 Bcf less than last year at this time and 189 Bcf below the -year average of 3,040 Bcf. At 2,851 Bcf, total working gas is within the -year historical range."
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