The Phil Flynn Energy Report
Still Not Over It
Hurricane Ida continues to take its toll— now it’s breaking records, now taking the title as the most disruptive hurricane to oil supplies in history. Bureau of Safety and Environmental Enforcement (BSEE) reports show that 76.88% of oil production is still offline in the Gulf of Mexico, along with 77.25% of natural gas production.
The slow recovery of oil and gas production in the Gulf of Mexico is now at a pace that’s slower than that after Hurricane Katrina and Hurricane Ivan. In other words, Hurricane Ida, when looking at oil production, has been the most destructive storm in history.
Production losses from the Gulf of Mexico will continue to add up, further tightening the U.S. oil supply and gas supply. This means that oil prices that normally might be going down during the shoulder season are continuing to stay strong. If these production issues aren't corrected quickly, we’ll be very vulnerable to price spikes in the future.
Global natural gas prices are going through the roof and are creating a risk to the global economy; at the very least, the European and Asian economies. Tropical Storm Mindy— which formed yesterday— isn’t helping matters, but it’s already on land in production areas.
Natural gas prices spiked yesterday, something we warned would happen sooner or later. A big short position in natural gas had to be covered as the reality of the production losses from the Gulf of Mexico continues to set in. It’ll drive our storage levels even lower ahead of the key winter heating season.
The spike in gasoline is probably a preview of what we're eventually going to see for gasoline and diesel. Just like the natural gas market, oil, gasoline, and diesel are a powder keg that’s getting ready to explode. The only thing holding us back is the fact that we’re in shoulder season and that the possibility of new Covid-19 restrictions could hurt demand in the future. We're seeing record-breaking demand in the United States and in India, along with a big rebound in demand in China.
Gas prices at the pump prices shouldn’t be going down anytime soon, either. I think there's still a very strong possibility that prices could start spiking higher, especially when demand picks up as we get closer to the holidays.
The Department of Energy reports that 5 refineries in Louisiana remain shut, accounting for about 1.0 million barrels per day (bpd) of refinery capacity, or approximately 6% of the total U.S. operable refining capacity. All 3 refineries in the Baton Rouge area and 1 near New Orleans (1.3 million bpd of refinery capacity) have initiated the restart process, although the refiners won’t produce at full rates for several days.
Refinery operations can’t restart until feedstock supply, power, and other essential third-party utilities are restored. Fuel stocks in the area are being drawn down from storage while refineries and offshore production are restored.
The Department of Energy also reports that widespread power outages, fuel shortages, and high demand numbers are leading to retail gas station outages in impacted areas. Available stations are experiencing long lines and high demand. Resupply may be impeded by power outages at terminals, and heavy traffic in some areas is also delaying resupply efforts.
We did get the first snapshot of what the storm’s impact on inventories might be, and let's face it— it wasn’t pretty. MarketWatch reported:
The American Petroleum Institute reported late Wednesday that U.S. crude supplies fell by 2.9 million barrels for the week ended Sept. 3, according to sources. The API, which released its data a day later than usual due to Monday's Labor Day holiday, also reportedly showed an inventory decline of 6.4 million barrels for gasoline, while distillate stockpiles fell by about 3.7 million barrels. Crude stocks at the Cushing, Okla. storage hub, meanwhile, edged up by 1.8 million barrels for the week, sources said.
S&P Global Platts also put out a report that shows that OPEC+ production, despite the promised increase, has yet to happen. OPEC+ and its allies raised crude production by just 50,000 bpd in August, despite loosening their output quotas, as disruptions and maintenance in a few countries capped the group's gains.
S&P Global Platts said:
OPEC's 13 members pumped 26.97 million [bpd] in the month, a rise of 140,000 [bpd] from July, while [9[ non-OPEC partners led by Russia added 13.29 million [bpd], a drop of 90,000 [bpd], according to the latest S&P Global Platts survey.
The combined output of 40.26 million [bpd] marks the sixth straight month the alliance has stepped up production. But it could have been more in August.
The current OPEC+ supply accord calls for monthly 400,000 [bpd] increases in the group's collective quotas, as it aims to capture the global economic recovery from the pandemic.
Iraq, Russia, Saudi Arabia, and the UAE were the largest gainers in the month, but Kazakhstan underwent major field maintenance that saw its output decline, and Nigeria suffered a significant oil spill near a key export terminal that shut in production.
Several other members continued to pump below their allocations due to a lack of spare production capacity.
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