Oil prices and the oil industry is battling back from severe challenges, whether it be the aftermath of Hurricane Ida or macroeconomic fears created by the Evergrande crisis in China. The markets are feeling a bit better after Evergrande Group paid interest on one of its bonds, yet few believe that this drama is over. Traders are starting to realize that a quick return to normal for oil and gas production from the Gulf of Mexico is going to be put off for some time due to major damage to Shell’s Mars and Olympus platforms that will keep production down well into the new year.
Yesterday, the Bureau of Safety and Environmental Enforcement (BSEE) reported that 16.64% of Gulf of Mexico oil production is still shut-in, which is the equivalent to some 320,909 barrels per day. The BSEE also reports that natural gas production still has 25.42% of gulf production shut-in. That’s the equivalent of 566.67 MMCFD. That lack of production is going to lead to a dangerous situation where crude supplies and natural gas supplies are still going to be falling at a time when the demand is going to rise again this winter.
The impact of Hurricane Ida and relatively strong U.S. demand showed up in yesterday’s American Petroleum Institute (API) report data. The API reported a 6.108 million barrel drop in crude oil supply along with a 2.720 million barrel drop in distillate supply. Distillate supplies are going to become more critical as we get into winter and natural gas prices are high and countries are going to be looking for other fuels to stay warm.
The only slightly price negative item in the report was gasoline supplies that fell less than expected 432,000 barrels. Most were expecting to see a bigger draw in gasoline supplies because of refinery outages. The big draw in gas and crude oil supply suggests that the refineries aren’t coming back on a line as quickly as some people thought or at least it’s not showing up in this week’s report.
While the crude oil market is very bullish we are still going to face stiff upper resistance at 7260. I do expect that we’ll see similar numbers on supply and demand in this week’s Energy Information Administration (EIA) report. Oil traders also must be aware of the Federal Reserve announcement today and the Jerome Powell press conference. Both could create some volatility for the underlying fundamentals for the oil market. Oil products also remain very bullish but we are still in shoulder season despite the strength that we’re seeing in the market. Look to buy brakes and we continue to warn to be hedge as we have significant upside risks in this market.
Some people are concerned that the pullback that we’ve seen in natural gas prices means that the crisis for natural gas is over. I say far from it. We still have major issues on the supply side going into winter. You still have to be a hedge for a potential spike this winter. Concerns in the short term may be overplayed a bit because we are in a period of relatively weak demand. But those fears could become a reality when winter comes around.
EBW Analytics says that, “October natural gas contract’s rapid descent is mirroring its meteoric rise. The front-month is down 84.5¢ from last week’s intraday high—returning 47% of the prior month’s gain—with the technical outlook suggesting more declines ahead. Strong production nominations, a downturn in LNG feed gas, and bearish weather may further ease the path lower for natural gas in the near term. Natural gas fundamental shifts over the past week, however, have only mildly softened the chance for extreme bullish natural gas price scenarios this winter. Dramatic price results are largely technically driven, but early heating season weather will prove crucial. Price volatility may soften but is likely to remain high with natural gas fundamentals extremely price-inelastic in the short term. If the currently bearish weather forecast for October begins to shift in a colder direction, natural gas futures could quickly regain last week’s upward momentum.