The Phil Flynn Energy Report
It's Just Evergrande
While global oil inventories fall at an alarming rate, continuing concerns about China property developer Evergrande are holding prices back. Crude oil prices hit the highest level since last July after the Energy Information Administration (EIA) showed another drawdown in crude oil supply. This was also supported by a report from the Bureau of Economic and Environmental Enforcement (BSEE) which said that for crude oil and gasoline, production in the Gulf of Mexico continues to struggle getting back to normal.
The EIA said that U.S. commercial crude oil inventories decreased by 3.5 million barrels from the previous week, putting them at 414.0 million barrels, 8% below the 5-year average for this time of year. The BSEE reported that 16.18% of Gulf of Mexico oil production is still offline, as well as 4.27% of natural gas production.
The Federal Reserve seems optimistic about the economy and jobs, suggesting that the time for bond tapering is near, beginning this year and more than likely ending next year. This then sets the stage for an interest rate increase. Fed Chairman Jerome Powell seemed to dismiss the systemic risk of the possible Evergrande default risk, calling it a Chinese issue.
The markets and futures gained more momentum throughout the commodity complex with industrial metals recovering back in a dramatic fashion. Oil was also rallying and that carried into the overnight session until more worries about Evergrande seemed to creep up.
Financial regulators in Beijing issued a broad set of instructions to China Evergrande Group, telling the embattled developer to focus on completing unfinished properties and repaying individual investors while avoiding a near-term default on dollar bonds, Bloomberg Law reported on Thursday.
Then things took a dip after a report that a major backer sold its bonds. Bloomberg reports:
Chinese Estates Holdings Ltd. sold shares in China Evergrande Group and said it may exit all its holdings, a major withdrawal of support from one of the embattled developer’s long-time backers.
Chinese Estates sold 108.9 million Evergrande shares for HK$246.5 million ($31.7 million) from Aug. 30 to Sept. 21, according to a statement to the Hong Kong exchange Thursday. The Hong Kong real estate firm may sell its remaining 751.1 million Evergrande shares, adding it could take a loss of about HK$9.5 billion if it sold all the stock.
Despite fears about the Evergrande situation, the reality of one of the tightest crude oil markets we've had in many years is probably going to keep this bull market intact. The market is facing technical resistance as it has the potential to test Fourth of July holiday highs. It’s also trying to balance the real possibility of a supply shortage versus the possibility that at some point we could see a slowdown in China's economic engine.
The EIA report was supportive across the board. The EIA said that motor gasoline inventories increased by 3.5 million barrels last week and are about 3% below the 5-year average for this time of year. Finished gasoline and blending components inventories both increased last week. While the number wasn’t as bullish as the API version, the reality is that gasoline supplies normally start to build this time of year anyway.
Distillate fuel inventories decreased by 2.6 million barrels last week and are about 14% below the 5-year average for this time of year. Distillate supplies are far below average at a time when the world may have to rely more on diesel fuel to stay warm and keep their factories going this winter, making them even more bullish.
The natural gas crisis in Europe, which was created by bad policy and over-reliance on Russia for products, could have a real impact on their economy, not to mention the lives of their citizens.
A very disturbing part of yesterday's Energy Information Administration report was the propane inventory numbers. The EIA reported that propane and propylene inventories decreased by 0.5 million barrels last week and are about 21% below the 5-year average for this time of year. This is a big issue for the agriculture community in rural America that depends heavily on propane to keep their houses warm and their farms operating.
Natural gas futures didn't hold back yesterday, but the overall fundamental picture for natural gas is still extremely bullish. Predictions by many are telling us a cold winter is ahead and that means we could have extreme price increases for natural gas this winter.
We’ve been saying for the entire complex to try to be hedged and right now it appears that some of the options are very expensive. Speculators could look at a complex spread, such as butterfly options spreads, if they want to take advantage of what could be substantial price increases going into winter.
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