Storm Chasing
The National Hurricane Center is warning that interests in the northwestern Bahamas and Florida should monitor the progress of a tropical wave disturbance known as Invest 99-L and already there are signs in the oil market that oil companies are heeding the warning. Strong product buying on the Gulf Coast ahead of what could be a major storm for contractual buyers and sellers is the prudent thing to do. While the National Hurricane Center says that there are large uncertainties regarding this system's development and future track, it is too early to speculate on what specific impacts might occur in the northwestern Bahamas, Florida or beyond.
Oil traders and commodity traders won’t wait around. Speculate is what they do. We have already seen significant buying in natural gas and unwinding of spreads on the rumors of the storm as well as positioning in cash and other markets. Talk of big call option buying from the trading floor in oil was reported. That may accelerate as the storm details continue.
Dave Tolleris, meteorologist, has been watching this tropical disturbance from the beginning. He is warning that this storm based on his tracking has the possibility of being a major hurricane that could reach the Gulf of Mexico. Overnight he said that the early Thursday morning European storm models show that the storm becomes a hurricane that will go across South Florida as a tropical storm. Then the storm at that point will be named Hermine and parallel the West Coast of Florida. Its track then puts it in the Florida panhandle on August 31st. That will put the storm at a category 2 strength. That would flood already rain battered areas of the Gulf Coast and cause problems for refiners as well as producers and transport.
Mr. Tolleris says that he expects that when the European ensembles tracking comes out later in the day, it may take the storm track significantly to the West which could increase the chances for a much stronger storm. He says the risk is still quite high that this storm will swing out to the western gulf and become a much more powerful hurricane that could reach a category 4 or higher.
Tolleris warns that the GFS storm model that takes the system over Eastern Florida and then out to sea is a “meteorological impossibility”. He also says that some people will look at the European Model and dismiss this storm as a moderate hurricane in the Eastern Gulf of Mexico which may be true but he says that the risk is quite high that this storm could become a more powerful hurricane.
Right now the National Hurricane Center gives the feature a 50% chance of becoming at least a tropical depression in the next two days and an 80% chance in the next five days. The USA Today reported, "if it hits Florida as a hurricane, it would be the first hurricane to strike the Florida Peninsula since Wilma in October 2005," according to AccuWeather hurricane expert Dan Kottlowski.
Oil prices are still under pressure as the market has more evidence of abundant supply and the risk that this storm will give the demand side a hit. We saw the Energy Information Administration report a larger than expected increase in U.S. commercial crude oil inventories which rose by 2.5 million barrels from the previous week. Part of the increase was because of a sharp drop in refinery runs to 92.5% of capacity even though that is a high number for this year. Floods in Louisiana probably helped Gulf Coast gasoline stocks rise. Over all the EIA said that total motor gasoline inventories remained unchanged last week and are well above the upper limit of the average range. Finished gasoline inventories increased while blending components inventories decreased last week. Distillate fuel inventories increase d by 0.1 million barrels last week and are near the upper limit of the average range for this time of year.
Supply glut notwithstanding the long term outlook for global oil markets, are in for a dramatic tightening in the next few years. As global demand is going to shatter all-time records next year, Big Oil companies do not have the money to invest to keep up with that demand. Case in point, yesterday a story in the Wall Street Journal reported that big oil debt loads are at an all-time record high. The Journal reports that, “Some of the world’s largest energy companies are saddled with their highest debt levels ever as they struggle with low crude prices, raising worries about their ability to pay dividends and find new barrels. Exxon Mobil Corp (NYSE:XOM)., Royal Dutch Shell (LON:RDSa) PLC, BP (LON:BP) and Chevron Corp. (NYSE:CVX) hold a combined net debt of $184 billion—more than double their debt levels in 2014, when oil prices began a steep descent that eventually bottomed out at $27 a barrel earlier this year. Crude prices have rebounded since, but still hover near $50 a barrel.” The Journal warns that, “The debt is piling up despite cuts of billions of dollars on new projects and current operations. Repaying the loans could weigh the companies down for years, crimping their ability to make investments elsewhere and keep pumping ever more oil and gas.
The companies spent more than 100% of their profits on dividends last year. This year, the problem got worse. In the April-to-June period, Exxon paid $3.1 billion in dividends and had just $1.7 billion in net income, according to S&P Global Market Intelligence. Shell paid $1.26 billion in interest in the first half of 2016, compared with $726 million in the same period a year earlier. “They are just not spending enough to boost production,” said Jonathan Waghorn, co-portfolio manager in London at Guinness Atkinson Asset Management Inc. who helps oversee more than $400 million across a range of energy funds, including shares in Exxon, BP, Chevron and Shell.”
As far as I am concerned, we are seeing complacency in the market when it comes to supply and demand balance the way we did back in the last decade. Long term the lack of investment will make it hard to meet future demand. Whenever we have seen this in the history of oil markets going back as far as “Spindle Top”, it has meant sharply higher prices in the future.