The Phil Flynn Energy Report
It’s a Supply Thing
Oil prices surged to the highest level since July after the Energy Information Administration (EIA) reported that U.S. crude oil supplies fell for the 6th week in a row. In the report, they stated that U.S. commercial crude oil inventories fell by 6.4 million barrels, putting inventories about 7% below the 5-year average for this time of year.
Hurricane Ida and Hurricane Nicholas are now both factors in those falling supplies, though this trend of falling supplies began well before the storms. The comeback of oil and gas production in their aftermath is the slowest recovery in the history of hurricanes.
That said, we did see some significant progress reported yesterday. The Bureau of Safety and Environmental Enforcement (BSEE) reported that 29.52% of Gulf oil production is still shut in. That’s the equivalent of 537,193 barrels per day (bpd). For natural gas, it’s 39.40% of production that’s still shut in, or 878.70 MMCFD.
This situation shows that we have a very tight supply versus demand situation because the supplies are not coming back online fast enough. We're probably going to see a continued price squeeze. Crude oil prices did pull back from the Bollinger band resistance area, so we'll likely consolidate a bit, but we’re still on the path to move higher.
We’ve been warning for a long time that there’s significant upside risk in oil prices and we're starting to see that happen now. We’re still in the shoulder season, which is giving us a little bit of cover, but it doesn’t take away the fact that we’re on a trajectory toward being undersupplied this winter. Demand is strong, but right now it's a supply thing; it’s unlikely that the supply will keep up with demand. That means higher prices until demand cools off. Sharply higher prices for energy is becoming a risk to the European economy in the EU and to the economy in the U.S, as well.
China is starting to get nervous about rising food and energy prices. The country is committed to using its strategic petroleum reserve in an effort to cool off energy prices, but I think they're going to have a very hard time because it only adds to the demand side of the equation. According to Reuters, China thinks it has an answer for that:
China will toughen punishments for regions that fail to meet targets aimed at controlling energy use, the state planning agency said in new policy guidelines published on Thursday.
China has been cracking down on high-energy consuming projects after 20 of its 30 provinces and regions failed to meet energy consumption targets in the first half of the year.
The National Development and Reform Commission (NDRC) said it would hold local officials accountable for limiting absolute energy use and for meeting targets to cut energy intensity - or the amount of energy used per unit of GDP.
The NDRC also said China would improve its mechanisms for setting overall consumption targets and ensure they are distributed fairly across regions.
Then they’ll have to balance that clampdown on "excessive demand" and with slowing economic growth.
I think it's clear that China is having a problem with inflation pressures and the fear it's going to hurt their economy. They're getting socked by sharply higher food prices, and it’s only going to get worse when they have to come in and start buying more of the U.S. crop.
As far as energy goes, China's experiment with trying to control prices will ultimately fail and create a situation that’s going to be a bigger problem for them in the long run. In the future, these actions will either lead to sharply higher prices for oil and natural gas or it's going to create a recession.
Another explosive day for natural gas! The production situation in the Gulf of Mexico is adding to a potential supply shortage around the globe. U.S. futures again had another day of rocketing higher before the market pulled back a bit. And it's not just natural gas that is on fire.
Propane prices have hit the highest level since 2014. For those that haven't filled up their propane tanks in some time, it's going to be extremely expensive. We better hope and pray that we don't see a cold winter this year.
Propane prices have risen almost 60% so far, and this is small compared to other commodities. (Natural Gas: +126%, Heating Oil: +97%, Gasoline: +95%, WTI Crude: +89%, Brent Crude +86%, Aluminum: +61%, Sugar: +61%, Coffee: +52%, Copper: +42%, Corn: +39%, Cotton: +39%, Soybeans: +29%, Wheat: +26%. On the downside, Lumber has fallen -2% and Gold: -9%, Palladium: -11%, Silver: -13%.)
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