The Energy Report 10/09/18

Storm Clouds on The Horizon

There are storm clouds on the horizon. Not only are we seeing oil production get shut down from Hurricane Michael, you have a warning from the International Monetary Fund (IMF)about trade wars potentially slowing growth and a warning from the  International Energy Agency (IEA) that high oil prices could be doing damage to the global economy and that OPEC and other major oil producers need to hurry and do something about it. Yet, signs that supply from Iran is falling faster than previously thought, along with major refinery outages that could crimp supplies in the Northeast is giving bulls the edge in early trade. Behind all the news, the big picture oil super-cycle is in play and the trade is starting to wake up to the fact that the underinvestment in the sector is now creating the tightest petroleum market conditions that we have had in over a decade.

Hurricane Michael is now a category 1 hurricane but is expected to strengthen to a Category 3 storm by the time it hits land on Wednesday. Already the storm is shutting in production. The Bureau of Safety and Environmental Enforcement (BSEE), as of 11:30 a.m. yesterday, reported that there had been an evacuation of 10 production platforms, 1.46 percent of the 687 manned platforms in the Gulf of Mexico. They estimated that approximately 19.07 percent of the current oil production in the Gulf of Mexico has been shut-in. It is also estimated that approximately 11.09 percent of the natural gas production in the Gulf of Mexico has been shut-in. The patch of the storm into the Panhandle is the first in that area since 2005 and it looks like major refineries will be spared from the brunt of the storm. Still, it should be remembered that the Gulf of Mexico is home to 17 percent of daily U.S. crude oil output and 5 percent of daily natural gas output, according to the U.S. Energy Information Administration. We will see more platforms and production shut in today.

The USA Today reports that on its current track, Michael will move across the eastern Gulf of Mexico throughout Tuesday and then move inland over the Panhandle or Big Bend area of Florida on Wednesday, according to the hurricane center. From there, Michael would move northeastward across the southeastern states on Wednesday night and Thursday. The path is out of the way of major refineries but with flooding fears and transportation issues, products should be supported.

Products are also getting support  from  a major fire at Canada’s largest oil refinery, the Saint John, New Brunswick refinery owned by Irving Oil Ltd. The 320,000-barrel-a-day refinery  had an explosion in a distillate unit and will tighten already tightening distillate supply. The refiner is a source of product, sending cash market prices sharply higher in the Northeast.

Yesterday, the oil market was worried about the fact that India might continue to buy oil from Iran.  Today it is worried that there may not be much oil from Iran to buy. Reuters is reporting that Iran’s crude exports fell further in the first week of October, according to tanker data and an industry source, as buyers sought alternatives ahead of U.S. sanctions that take effect on Nov. 4. Iran exported 1.1 million barrels per day (bpd) of crude in that seven-day period, Refinitiv Eikon data showed. An industry source who also tracks exports said October shipments so far were below 1 million bpd. That is down from at least 2.5 million bpd in April, before President Donald Trump in May withdrew the United States from a 2015 nuclear deal with Iran and re-imposed sanctions. The figure also marks a further fall from 1.6 million bpd in September, according to Reuters. Maybe the reason the U.S. may be granting a waiver to India is that there is no other source of readily available oil.

 The IMF is sounding downbeat about the economy but still expecting decent growth. The AP said that the IMF announced it had reduced its outlook on the global economy to a 3.7% growth rate for this year and next, down 0.2% from what it had originally predicted in July. The organization’s assessment applies to the 19 nations of the European Union, as well as all countries in Central and Eastern Europe, Latin America, the Middle East and Sub-Saharan Africa. The IMF expects the U.S. economy to continue growing this year at 2.9%, but sees that rate falling to 2.5% next year amid the country’s escalating trade war with China. While the IMF’s outlook for the Chinese economy stayed at 6.6% this year, its forecast for next year of 6.2% represents the slowest growth rate the Asian country has seen since 1990.

Are you seeing red? Bloomberg News reports that International Energy Agency (IEA) is urging OPEC to open the taps as “Oil Market Enters ‘Red Zone’!”  Bloomberg writes that the International Energy Agency made a direct appeal to OPEC and other major oil producers to boost output, warning that prices are inflicting damage on the global economy. “We should all see the risky situation, the oil markets are entering the red zone,” IEA Executive Director Fatih Birol said Tuesday. “We should try to comfort the markets all together because it may be bad news for the consumers, importers today, but I believe it may well be bad news for the producers tomorrow.” The IEA, which advises most major economies on energy policy, said last week that rising crude prices may dent demand in some of the world’s fastest-growing nations unless producers take steps to boost supplies. Birol has welcomed efforts by top OPEC producer Saudi Arabia to increase output but believes market tightness is likely to persist.”

One way to try to lower gas prices is to use more corn. President Donald Trump has ordered the Environmental Protection Agency ( EPA ) to allow year-round sales of gasoline with 15 percent ethanol content, an increase over the 10 percent blends that are sold at most gas stations around the nation. The hope is that it will lower gas prices and help farmers that have been hurt by trade tariffs.

The tight oil market is no surprise to readers of the Energy Report! We warned years ago of how the drop-in oil investment would soon turn our glut into a shortage and we are almost there.  We still believe that even with ups and down, we are still on target for $84 WTI and $93 Brent this year. Product users should be hedged as more of the upside risks are becoming apparent. While oil may be range bound as supplies rise during maintenance season, the upside move in oil is still just beginning.

Stay tuned for the latest breaking developments on Hurricane Michael on the Fox Business Network ! Call to get on my list for special updates! Call; me at 888-264-5665 or email me at pflynn@pricegroup.com.

Phil Flynn

The PRICE Futures Group

Senior Market Analyst & Author of The Energy Report

Contributor to FOX Business Network

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