The Phil Flynn Energy Report 

A Systemic Risk

Users of oil and gas and propane had better be prepared for sharply higher prices
Finished gasoline and blending components inventories both decreased last week
U.S. LNG exports have grown faster than domestic natural gas production

The retreat by the U.S. energy industry on the world stage is being felt around the globe. Now with the expectations that global demand will exceed pre-covid levels in just a few months, users of oil and gas and propane had better be prepared for sharply higher prices.

The Energy Information Administration (EIA) report with its big headline "crude build" tried to ease those concerns, but it did not for long as the rest of the report data was more supportive to prices. A big drop in Cushing, Oklahoma, at a time of year when those supplies should be rising due to refinery maintenance, was a particular concern. The EIA showed a significant drop in refining activity, falling to 86.7% of capacity. Besides that, it looks like demand at this point has not been discouraged by higher prices.

The EIA numbers show that commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 6.1 million barrels from the previous week. At 427.0 million barrels, U.S. crude oil inventories are about 6% below the five-year average for this time of year. In addition, total motor gasoline inventories decreased by 2.0 million barrels last week and are about 2% below the five-year average for this time of year.

Finished gasoline and blending components inventories both decreased last week. Distillate fuel inventories are virtually unchanged from last week and are about 9% below the five-year average for this time of year. Propane/propylene inventories decreased by 0.6 million barrels last week and are about 21% below the five-year average for this time of year. 

Total commercial petroleum inventories increased by 4.9 million barrels last week. Total products supplied over the previous four-week period averaged 20.7 million barrels a day, up by12.5% from the same period last year. Over the past four weeks, motor gasoline products supplied averaged 9.2 million barrels a day, up by 6.9% from the same period last year. Distillate fuel product supplied averaged 4.2 million barrels a day over the past four weeks, up by 6.6% from the same period last year. Jet fuel product supplied was up 53.5% compared to the same four-week period last year.

On the demand side, the EIA reported that "Total products supplied over the last four-week period averaged 20.7 million barrels a day, up by 12.5% from the same period last year. Over the past four weeks, motor gasoline product supplied averaged 9.2 million barrels a day, up by 6.9% from the same period last year. Distillate fuel product supplied averaged 4.2 million barrels a day over the past four weeks, up by 6.6% from the same period last year.”

Natural gas futures got a boost on the winter forecast that shows a strengthening La-Nina that could bring us a cold winter. The EIA injection was much smaller than expected and raised concerns about winter even though the midday forecast seemed to ease concerns about the early cold. In addition, it showed that supplies held in storage grew by just 81 billion cubic feet last week, far less than the 93 billion medians of estimates compiled by Bloomberg.

The EIA reported natural gas spot prices forecast at the U.S. benchmark Henry Hub would average $5.67 per million British thermal units (MMBtu), the highest winter price between October and March since 2007–2008. They say that the increase in Henry Hub prices in recent months and forecast reflects below-average storage levels heading into the winter heating season and strong demand for U.S. liquefied natural gas (LNG), even though there has been relatively slow growth in U.S. natural gas production. We expect Henry Hub prices will decrease after the first quarter of 2022, as production growth outpaces growth in LNG exports and will average $4.01/MMBtu for the year.

The EIA says that U.S. LNG exports are establishing a record high this year, and we expect them to set a new record high next year. We expect LNG exports to average 9.7 billion cubic feet per day (Bcf/d) this year (3.2 Bcf/d more than the 2020 record high of 6.5 Bcf/d) and exceed annual pipeline exports of natural gas for the first time. The year-on-year increase in LNG exports coincides with slight growth in U.S. natural gas production. As a result, we expect U.S. dry natural gas production to average 92.6 Bcf/d this year, which is 1.1 Bcf/d more than in 2020 but 0.3 Bcf/d less than in 2019.

Because U.S. LNG exports have grown faster than domestic natural gas production, inventories are lower than average. As of the end of September, we estimate that total U.S. natural gas inventories are 5.5% below the five-year (2016–2020) average. We forecast that U.S. natural gas inventories will begin the winter heating season on November 1 at 3,572 Bcf, or 4.8% below the five-year average. Lower U.S. inventories could contribute to more natural gas price volatility, particularly if any area in the United States experiences a severe cold snap, making this winter’s price outlook very uncertain.

This winter will be very uncertain. There are risks that the EIA forecasts for sharply higher prices might be conservative. Despite higher prices, we still recommend that you get hedged because if winter is bad, we could see record-breaking price increases.

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