The Phil Flynn Energy Report
With all of the drama going on in the world, be it Afghanistan or the devastating hurricane in Louisiana, it should be noted that U.S. total product demand hit an all-time high this week. This will be very important to remember because we know that in the coming weeks, supply and demand data out of the U.S. will be skewed due to the devastating damage that we’ve seen in Louisiana caused by Hurricane Ida.
According to the Energy Information Administration (EIA), total domestic implied petroleum demand set a new all-time high of 22.8 million barrels per day (bpd). While weekly numbers can sometimes be overstated, I still believe it's a pretty incredible number. It shows that demand has come back dramatically since the Covid-19 situation to pre-pandemic levels.
If the weekly numbers don’t get you excited, then take a look at the monthly average in the U.S., which shows consumption over 20 million bpd of petroleum products. No matter how you slice it, those are impressive numbers and they show the incredible resilience of the U.S. energy demand.
That incredible demand is one of the reasons global oil inventories are falling, and it’s also a reason OPEC+ felt very comfortable raising production by 400,000 bpd. Yesterday the OPEC+ number crunchers could see quite clearly that even after raising production by 400,000 bpd, the global oil market would still be in a tight supply deficit.
Before the meeting, the Russian deputy chairman of the Russian Federation and oil minister Alexander Novak gave the market a scare when he stated the obvious, saying that Russia could produce more oil than their OPEC+ quota. Now he never said that they would produce more than their OPEC+ quota, but that didn't matter. The comment caused a selloff in the price of oil.
My take on the Russian energy minister's comment is that he was sending a message to smaller OPEC+ countries that were potentially going to follow the same route that the United Arab Emirates followed last month, asking for a new baseline so that they could produce more oil. I think it was a thinly-veiled threat and it appeared to work, because what happened after was one of the shortest OPEC+ meetings in recent memory. Dissent was squashed as the group rubber-stamped the 400,000 bpd production increase.
Now, you may or may not be happy with OPEC’s decision, but we know somebody who was very happy with the decision: Joe Biden. The White House seemed to congratulate OPEC+ on raising oil output this morning and made a statement that said, “we're glad OPEC is continuing to increase oil production.”
What I wish I were hearing out of the White House is the Biden administration congratulating the U.S. energy companies that are making heroic efforts to bring back oil and gas production in the Gulf of Mexico.
Bringing back production in the Gulf is proving to be more challenging than it has been after past hurricanes. Port Fourchon in Louisiana, a launching point for a majority of all offshore oil production, took major hits.
Bloomberg reported that damage to the port, which services about 90% of the output from U.S. Gulf deepwater oil and natural gas wells, is extensive and widespread. Louisiana Highway 1 will need to be cleared of debris for heavy equipment to travel south to the port, while navigable waters around the port will have to be surveyed for safe travel.
The lack of electricity is also making it more difficult to bring production back online. The Bureau of Safety and Environmental Enforcement (BSEE) reported yesterday that 79.96% of Gulf oil production is still shut in, and natural gas production is still shut to the tune of 83.21%.
The U.S. isn't the only place that’s seeing demand records being broken. Reuters reports that India's gasoline demand is set to hit a record. They point to data from credit rating service Moody's, which expects India's gasoline consumption to increase by a whopping 14%. That puts Indian gasoline consumption at 739,000 bpd in the fiscal year to March 22.
The data also predicts that Indian gasoline demand will rise by 20,000 bpd to 760,000 bpd for October to December; that's up from a previous estimate of 740,000 bpd. That brings their annual forecast to March 22 to 725,000 bpd, 11% higher than a year ago. Passenger vehicle sales in India rose by 45% to 264,442 units in July, driven by pent-up demand, according to data from the Society of Indian Automobile Manufacturers.
Natural gas prices are on fire again as concerns about demand outstripping supply are overwhelming. Worries about electricity outages and European gas prices hit another record high today. Reports that Russia is going to refill its gas storage, leading to less exported product from Russia, are also supportive. Russia is supposed to be a reliable supplier to Europe, but it appears they’re looking out for their own needs at a time when supplies are tight.
The impact from the storm is going to start raising gasoline prices and diesel prices in the coming weeks. While the impact right now has been relatively mild, we’ll start seeing this market creep up in the coming days and weeks. With record-breaking demand and supplies being limited, we should see prices go up at a time of year where they normally go down.
Right now, I think prices will creep, but they’ll eventually leap; if you need coverage or protection against rising prices, I would start to do that now.
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