Oil prices are fighting off the Federal Reserve. Traders are more concerned this morning about the lack of supply coming out of Libya and the potential for tropical storms in the Atlantic. Federal Chairman Jerome Powell sent a message to the equity markets that the Fed is prepared to do whatever it takes to fight off inflation even if that means a recession. That has caused the dollar to go on a record-breaking rally this morning, yet the oil market continues to stay relatively strong. The realities of tightness of supply are keeping the petroleum markets elevated.
At the same time, concerns about diesel shortages are growing. A fire at the BP (NYSE:BP) Whiting, IN, plant last week is causing the Biden administration to offer waivers to make sure that supplies keep flowing. The US Environmental Protection Agency and Transportation Department on Saturday took steps to alleviate potential fuel shortages in four states after the unanticipated shutdown of the BP Whiting refinery, according to Reuters. Reuters reported on Friday that the 435,000-barrel-per-day refinery was shut down and undergoing damage assessment following the loss of electrical power in cooling water systems in a fire on Wednesday. Gas Buddy spokesperson Patrick DeHaan said his sources suggest that they could be restarting the facility as early as Tuesday. That is a welcome relief because, let’s face it, the supply situation is too tight for comfort.
Fighting in Libya, meanwhile, is already taking supplies offline. More than 30 people were killed in violent clashes over the weekend and, according to reports, it impacted oil production. Anas Alhajji reported that Libya’s oil production declined by 6 kb/d. Production on Saturday was 1.219 mb/d. It was 1.225 Thursday.
This comes as the hurricane season is kicking into high gear. The National Hurricane Center is monitoring four tropical disturbances. It looks like one could be a problem in the Gulf of Mexico later on this week.
Fox Weather reports that, “The FOX Forecast Center is monitoring several tropical disturbances in the Atlantic basin for possible development over the next several days. The first disturbance is currently producing minimal shower and thunderstorm activity over the eastern Caribbean Sea. This system is expected to move west-northwest through the rest of the weekend, and environmental conditions could become more conducive for slow development when it moves across the central and western Caribbean Sea early next week.
As of Monday, the National Hurricane Center said the tropical disturbance had a low chance of development in the next five days. Far to the east of that system, a tropical disturbance in the central Atlantic is currently producing a large area of disorganized showers and thunderstorms. According to the FOX Forecast Center, environmental conditions could support some gradual development of this second disturbance through early next week as it moves westward at 10 to 15 mph across the eastern and central tropical Atlantic. As of Monday morning, the NHC said the tropical disturbance has a 50% chance of development over the next two days and an 80% chance of developing into a tropical system over the next five days.
Record-breaking prices for natural gas and power have eased a bit in Europe and here in the United States. The storm potential in the Gulf of Mexico should provide some underlying support whether it’s natural gas or whether it is oil production or refining capacity. We are not in a great position at this point to lose any of that.
Energy Secretary Jennifer Granholm sent a nasty letter to oil companies basically suggesting that they quit exporting diesel because of the diesel shortage. That request is somewhat counterintuitive to the Biden administration’s record releases from the Strategic Petroleum Reserve, which have no restrictions on whether or not that oil could be exported. This administration, when it comes to energy, is totally out of touch with reality.
The biggest question for the oil market is whether a potential recession is going to offset the demand for oil to make up for a structurally undersupplied market. If you’re a hedger, you better not make the mistake to be too complacent because there’s compelling evidence that even if demand slows down to a recession, normal demand growth is going to keep this market very tight and the price is very high. We can kind of see with the stronger dollar the fact that oil prices are starting to ignore the recession fears. We will have to wait and see how things play out but our recommendation is to use market weakness to put on hedges as well as other strategies. Every pullback that we’ve seen over the last couple of years has been that opportunity and if you missed it, you ended up paying for it in the long run. I don’t believe anyone thinks that our supplies of anything are adequate going into winter so that means that there are extreme risks of major price spikes in the future. Better to be safe than sorry.
With the storms brewing in the Gulf of Mexico make sure you download the Fox weather app to keep up with the latest developments. Also, stay tuned to the Fox Business Network because they are invested in you.