Fed Up
Oil prices are dipping after a 17% weekly rally as Fed speakers put a September interest rate hike back into play and a drop in the Shanghai composite. Stanley Fischer, vice chairman of the Federal Reserve, suggested the recent volatility of global financial markets could cause the Fed to hesitate to raise interest rates, but only if it persisted according to Reuters. Also, reports that other global central banks are telling the Fed that they are ready for a rate hike so just get on with it, is giving oil another reason to pullback after the biggest run up in over 5 and a half years.
Oil prices may also get a boost from the fact that perhaps U.S. oil production may be falling faster than most people thought. Despite added one oil rig to the mix last week, the Energy Information Administration may report that previous drops in Rig counts and cut backs in Gulf of Mexico oil production may have reduced output more than previously thought.
Dow Jones reports that "The Energy Information Administration (EIA's) monthly report on oil production, due today, will include updated output data for January-June due to an overhaul of the agency's reporting process," a spokesman says. The EIA has started surveying companies directly about oil production, rather than relying on state agencies, and analysts expect the new surveys to yield more-accurate and timely data. Some market watchers speculate that Monday's report could show lower production year-to-date, which could help the current price rally extend to a third day."
The oil patch may have dodged a bullet after tropical storm Erica dissipated but a Hurricane named Fred may have us start to worry next week. Still the EIA in a special report said "Offshore energy production in the Gulf of Mexico has experienced relatively minor disruptions because of tropical storms and hurricanes in recent years, and the National Oceanic and Atmospheric Administration (NOAA) has predicted a below-normal 2015 hurricane season in its updated Atlantic Hurricane Season Outlook, released on August 6. Hurricane-related risk to total U.S. crude oil and natural gas production has decreased over recent years as the share of total U.S. production originating in the Gulf of Mexico has declined sharply. In 2003, 27% of the nation's crude oil was produced in the Gulf of Mexico; by 2014, that share had declined to 16%. The Gulf of Mexico's share of natural gas production has also declined from a high of 26% in 1997 to 5% in 2014.
This decline in the Gulf of Mexico's share of production has reduced the vulnerability of U.S. crude oil and natural gas supply to hurricanes. Based on NOAA's outlook, EIA estimated in its June Short-Term Energy Outlook that storm-related disruptions in the Gulf of Mexico during the 2015 hurricane season would total 9.7 million barrels of crude oil and 15.9 billion cubic feet of natural gas, or 3.5% and 2.8% of total Gulf of Mexico oil and natural gas production, respectively, and even smaller percentages of total U.S. production. No crude oil or natural gas production in the Gulf of Mexico was shut in during the 2014 hurricane season, and EIA estimated a 14% probability that production during the current hurricane season will also be unaffected.
Strong storms are still capable of causing significant production outages. Hurricane Katrina, which made landfall on the U.S. Gulf Coast 10 years ago Saturday, and Hurricane Rita, striking less than a month after Katrina, shut down almost all offshore natural gas and crude oil production for several days, with production remaining at reduced levels for months after the hurricanes. In September 2008, Hurricanes Gustav and Ike shut down almost all production in the Gulf of Mexico. Even if the offshore rigs are not directly in the projected path of the hurricane, these rigs may be evacuated as a precautionary measure.
The Gulf Coast is also home to about half of U.S. refining capacity, and several natural gas processing and distribution facilities that could also be affected by severe weather. However, high levels of crude oil inventories, both domestically and globally, could mitigate the supply impacts of weather-related disruptions. Similarly, natural gas processing capacity has been added in areas beyond the Gulf Coast in recent years, lessening the potential effect of storm-related processing outages.
Gas prices continue down and many areas of the country are paying below $2.00 a gallon. Low oil prices have made it easy for refiners to crank out gas and profits so much so that Warren Buffet is betting that this golden age of refining is going to continue. The Wall Street Journal reports that" Billionaire investor Warren Buffett's company has amassed a stake worth nearly $4.5 billion in Phillips 66 (NYSE:PSX) more than a year after trading a chunk of its holding in the oil refiner for a chemical business investment. A regulatory filing says Berkshire Hathaway Inc. (NYSE:BRKa) has accumulated about 58 million shares, which amounts to more than 10% of the Houston company's stock." AAA put the national average for regular unleaded at $247.1! Maybe that will give spending a boost