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Risks Are Evolving

By Phil FlynnCommoditiesSep 20, 2021 09:18AM ET
Risks Are Evolving
By Phil Flynn   |  Sep 20, 2021 09:18AM ET
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Oil and products are off this morning in a general risk-off situation that has impacted almost all major commodities markets. Strength in the dollar and concerns about a weak stock market have traders giving into demand concerns. Yet on the other side, supply for oil and products will tighten despite progress made in bringing production of oil and gas back in the Gulf of Mexico. 

The BSEE reported Friday that 23.19% of oil production was offline in the Gulf of Mexico as well as 34.33% of natural gas production. The BSEE did not report over the weekend probably because they needed a much-deserved weekend off. Rising concerns about the Chinese economy and the potential for contagion are making traders nervous. The failure of Evergrande, China’s second-biggest property company, has people comparing the failure to Lehman Brothers and another financial crisis that could negatively impact gasoline demand.

Yet while things look weak, it does look like a typical Monday selloff and if the pattern goes with the odds, it should turn around on Tuesday. The market will get a reality check when it gets its first glimpse of oil Inventories after the American Petroleum Institute releases its data that should show a 4.7 million barrel draw in crude oil supply, a 5.0 million barrel draw in gasoline supply, a 4.0 million barrel draw in distillate and a 3.0 drop in refinery runs.

The risks of natural gas shortages are raising and they are big risks as far as keeping people warm and fed. ISIS reported that the U.S. trade group Industrial Energy Consumers of America (IECA), which represents industrial companies, urged the U.S. Department of Energy (DOE) on Friday to restrict or limit LNG exports on concerns of rising gas prices. IECA’s letter called on U.S. Energy Secretary Jennifer Granholm to require U.S. LNG producers to reduce exports to prevent price spikes this winter. The industrial organization also requested that the DOE place a hold on all pending export authorizations for new LNG export plants in the lower 48 states of the U.S..

A request from one trade group will unlikely make an immediate change to the Natural Gas Act (NGA), which is the framework for allowing U.S. LNG export licenses. The licenses are granted on a long-term basis to allow the LNG export plants to operate. Market pricing has not been a restriction for the production of LNG in the U.S., reflecting the government’s free-market principles. U.S. LNG producers, in their various export license applications, have cited ample production figures underpinning supply for their export volumes. The Henry Hub front-month futures price on the NYMEX has been trading at multi-year highs in recent weeks. The October 2021 front-month price closed at $5.34/MMBtu on Thursday.

The rise of natural gas prices increases the cost of natural gas liquids (NGLs), which are the feedstocks for petrochemicals and consumer plastics. The U.S. predominantly uses ethane as a feedstock to produce ethylene. Propane dehydrogenation (PDH) units convert propane into propylene. The U.S. has about 70m tonnes/year of LNG nameplate export capacity, with U.S. producer Cheniere’s 4.5m tonne/year Train 6 at Sabine Pass in Cameron Parish, Louisiana, next to start online, as well as the early commissioning of Venture Global’s 10m tonne/year Calcasieu Pass in Lake Charles, Louisiana.

Average feedgas of about 10 billion cubic feet/day (bcf/day) across the existing six LNG plants make up about 10% of the US marketed gas production, according to the US Energy Information Administration (EIA)’s 2021 estimate.

Prices in Europe and Asia have soared to record-high levels, as the ICIS Dutch TTF benchmark and the ICIS East Asia Index (EAX) for spot LNG cargoes have settled above multi-year prices. The TTF October ’21 November settled at $21.71/MMBtu on Thursday and the November ’21 was assessed at $23.45/MMBtu for Friday.

Bloomberg News reported that U.K. food and drink makers could run out of carbon dioxide within two weeks in the wake of an energy crunch, with meat production particularly vulnerable, an industry group warned. Soaring energy prices have forced two European fertilizer makers to halt some output in recent days, threatening shortages of CO2 — a byproduct of producing the nutrients. Chicken and pig plants rely on the gas to stun animals at slaughterhouses and beverage makers use it to give soda and beer its fizz. A lack of CO2 will cause “massive disruption” to food supplies within 14 days, the British Meat Processors Association said Friday. Meat companies may have to shutter production lines, leaving farms crammed with extra animals. Already this year, livestock plants have cut output due to worker shortages, while consumers have faced bare grocery store shelves amid a lack of truckers.

EBW Analytics reported that strong fundamentals, however, are likely to support renewed gains for natural gas as winter approaches. A return to last week’s highs—or beyond—remains likely into early winter. The restoration of 120,000 barrels/day of shut-in Gulf of Mexico output over the weekend may lead to a brief stumble early this week, but upward momentum and supportive fundamentals are likely to yield renewed gains in the near-to-medium term.

Even though natural gas is pulling back I think if you read what the stories are saying, there’s still significant upside risk for prices this winter. It is unlikely that the United States will put an outright ban on natural gas but it’s kind of ironic because Europe is now really depending on the U.S. and our production to bail them out. Russia already has been playing games with Europe as far as supply and trying to use the shortage to gain political leverage with their Nord Stream pipeline. Russia is not a reliable supplier because when it suits their political interest, they will cut off supply.

Risks Are Evolving

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Risks Are Evolving

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Comments (1)
Learned Trader
Jai_Shree_Ram Sep 21, 2021 12:21AM ET
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Phil Flynn, you are really a professional analysts. Thanks for your excellent articles.
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