The Energy Report 07/10/19

Storm Drain

Oil rises in a storm drain. Oil prices rise as crude oil supply drains and a storm in on the Gulf Coast and the Gulf of Mexico is causing evacuations and shutdown of platforms and rigs. This comes as the oil market will be looking for clues on the pace and velocity of rate cuts from Fed Chairman Jerome Powell’s testimony and signs of progress on U.S. China trade talks.

The American Petroleum Institute (API) reported another massive 8.129-million-barrel crude draw. This is the second big draw in a row and is erasing those inexplicable crude increases from earlier last month. The draw suggests that the U.S. oil market is starting to see the impact of OPEC production cuts, the lack of Venezuelan supply not to mention very sold U.S. oil demand. The bottlenecks and refinery mishaps that caused the builds have eased and that should lead to bigger draws.

The API also reported that gasoline supply fell by 257,000 barrels and distillates increased by a more than expected 3.690 million barrels.  Products a bit underwhelming but the oil draw is still the big story. The EIA is at 9:30 today. I think it may be more bullish than API.

Of course the weather can always mess things up. The soon to be Tropical Storm Barry is causing emergency evacuations and shutdowns. This will mess with production numbers as well as imports and exports in the coming weeks. This storm will add to the bullish momentum this week but will act as a headwind for bulls next week.

Fed Chair Jerome Powell will be in the hot seat for his two-day Humphrey Hawkins testimony. Oil traders get to hear him before the EIA comes out so we may get some moves based on his testimony. Lower rates or more dovish bullish for oil, hawkish bearish. Look for Democratic questioners to try hard to get him to bash President Trump.

Oil prices have been under pressure from concerns about global economic growth amid growing signs of harm from the U.S.-China trade war that has rumbled on over the last year. Lower economic growth typically means reduced demand for commodities such as oil.

Nat gas is hanging in as we are seeing new predictions of record demand and record production. The EIA in their Short-Term Energy Outlook wrote that EIA forecasts that U.S. dry natural gas production will average 91.3 billion cubic feet per day (Bcf/d) in 2019, up 8.0 Bcf/d from the previous record in 2018. EIA expects annual average U.S. natural gas production will rise by 1.4 Bcf/d in 2020.

EIA forecasts that Henry Hub natural gas spot prices will average $2.50 per million British thermal units (MMBtu) in the second half of 2019 and $2.77/MMBtu in 2020. EIA’s forecast for the second half of 2019 is 29 cents/MMBtu lower than forecast in the June STEO.

The lower forecast reflects recent price declines and EIA’s updated assessment of U.S. drilling activity and average well productivity. EIA’s forecast for the average Henry Hub price for December 2019 of $2.80/MMBtu should be considered in the context of NYMEX Henry Hub futures and options contract values for December 2019 delivery that traded during the five-day period ending July 3, 2019. These contracts suggest a range of $1.64/MMBtu to $4.03/MMBtu encompasses the market expectation for December Henry Hub natural gas prices at the 95% confidence level.

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Phil Flynn

The PRICE Futures Group

Senior Market Analyst & Author of The Energy Report

Contributor to FOX Business Network

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