As the first major hurricane of the season to make landfall in the heart of the oil and Nat Gas industry starts to slowly move out of the area the spot price of WTI is down by about $0.80/bbl on the week while spot Nat Gas is lower by $0.072/mmbtu as of this writing. Only refined products got a boost from the storm so far with RBOB up by $0.0363/gal and HO higher by $0.0234/gal. In spite of a significant amount of crude oil and Nat Gas production shut in on a preemptive basis the market has not shown any concern from a supply perspective as it appears at the moment that Isaac has not done any major infrastructure damage to the oil and Nat Gas rigs in the Gulf of Mexico. It is now just a matter of companies getting personnel back out on the rigs to make safety checks and if all is well to then resume production. I would suspect some of the production will begin to return by the end of the week.
On the refined product side about 1 million bpd of refinery capacity has been shut-in. The fact that the storm has been a very slow mover the risk of flooding is still a possibility. I have not heard of any major floods at any of the refineries yet (but that does not mean there are none). If flooding is not an issue than it is just a matter of power being available and those shut in refineries will likely begin the restart procedure possibly as early as the weekend but more likely early next week. Even if all of the shut refineries get back to normal operating levels by the end of next week the industry will have lost about 10 to 15 million barrels of refined products from the shut downs. The crude oil loss could be similar as about 1 million bpd of production was shut in while LOOP ...which flows about 1 million bpd of imports has been shut in since Monday. Assuming the receiving facilities in Louisiana are not damaged and power is available I would expect LOOP to resume operations by the weekend.
Inventory reports for the next several weeks are going to reflect the impact of Isaac. We can expect very large draws in both crude oil and refined products with crude oil likely moving to a deficit position compared to last year while both the gasoline and distillate fuel deficit versus last year will widen considerably from current levels (see below for a detailed discussion of the pre-Isaac inventory report from yesterday).
Whether or not the market reacts to the upside due to the aforementioned loss of oil... the oil balances have changed as a result of Isaac and the industry will be operating with less of a cushion than it did prior to the storm and we are still only in the early stages of the tropical weather season. The fact that the industry has experienced a loss of production may be enough for the Obama Administration to authorize a release of SPR oil which over the last week or so they have been signaling on an almost daily basis. That said even with the loss of oil supply there is still an ample amount of both crude oil and refined products for the system to operate without any outages. There is still no shortage of oil any place in the world.
So as the storm slowly moves north the industry quickly moves into the damage assessment mode as well as the safety check mode. Certainly any surprise issues will be met with a quickly upside push to prices depending on whether it is a production or refinery issue. The way the market has traded this week it appears that participants are relatively confident there will not be any production issues but a tad less confident that the shut in refineries will come back without incident. Both the HO and RBOB cracks have widened modestly this week (so far).
In the financial markets all players are awaiting Chairman Bernanke's speech tomorrow morning at the Jackson Hole Symposium. Will he or will he not signal the Fed's next move regarding another round of quantitative easing? Many in the market think he could ...especially since he did signal QE2 at the 2010 Jackson Hole Symposium. I am still of the view that the Fed will await more data... especially with the August employment data due out at the end of next week. If the Fed is going to embark on another round of QE the earliest it will be announced will be at the mid September Fed FOMC meeting in my opinion. If my view is correct I would expect a modest sell-off in most risk asset markets tomorrow with liquidity winding down very quickly as many players head out for the long holiday weekend in the US.
Global equity markets have continued to slowly depreciate in value ahead of tomorrow's Bernanke speech as shown in the EMI Global Equity Index table below. The Index has now lost 1.3% for the week narrowing the year to date gain for the Index to 3.7%. Over the last twenty four hours the US Dow was able to show a minor gain as the other nine bourses all lost value. Germany remains on top while China continues to hold the bottom spot in the Index showing a loss of 6.7% for the year and now over a 20% loss over the last 12 months or what is technically described as a bear market for China. Global equities have been a negative for oil prices as well as the broader commodity complex this week.
Wednesday's EIA inventory report was bearish for crude oil and distillate and neutral to bullish gasoline. Total commercial stocks increased strongly as did crude oil inventories seemingly from a large increase in crude oil imports. The overall reaction to the inventory report was relatively muted. Refinery utilization rates were unchanged on the week remaining at 91.2% of capacity. The data is summarized in the following table along with a comparison to last year and the five year average for the same week.
Total commercial stocks of crude oil and refined products increased by 4.7 million barrels after decreasing the week before. The year over year surplus widened to 9.1 million barrels while the surplus versus the five year average for the same week widened to 29.8 million barrels. By all measurements total oil supply in the US is still well balanced to comfortable irrespective of the evolving geopolitical risk in the Middle East. As discussed above the year over year surplus of total commercial stocks is likely to disappear in next week's report as a result of the preemptive shut-sin from Hurricane Isaac but there will still be an ample surplus when compared to more normal five year average.
Crude oil inventories increased (by 3.8 million barrels) versus an expectation for a modest draw. Crude oil inventories have been increasing steadily for most of this year and are still well above the levels they were at during the height of the recession as well as being at the highest level since 1990. Even with a decrease in stocks this week the crude oil inventory status versus last year is still showing a surplus of around 7.4 million barrels while the surplus versus the five year average for the same week came in around 24.2 million barrels. Crude oil imports increased strongly on the week.
PADD 2 crude oil inventories decreased modestly by about 0.6 million barrels while Cushing, Ok crude oil inventories also declined on the week by 0.4 million barrels. Crude oil inventories in the mid-west region of the US are off of their record high levels as the Seaway pipeline is now pumping oil out of the region as well as refineries running at over 90% of capacity. The decline in crude oil inventory in the region is bearish for the Brent/WTI spread. However, the spread traded has widened over the last twenty four hours as the market seems to be pricing in a SPR release. The Oct spread is once again approaching the $18/bbl level.
Distillate stocks increased and within the expectations for a modest seasonal build. Heating oil/diesel stocks increased by 0.9 million barrels. The year over year deficit came in around 30 million barrels while the five year average remained in a deficit of about 25.3 million barrels.
Gasoline inventories decreased modestly and more than the expectations as the summer gasoline driving season is now coming toward an end. Total gasoline stocks decreased by about 1.5 million barrels on the week versus an expectation for a smaller draw. The deficit versus last year came in at 7.4 million barrels while the deficit versus the five year average for the same week was about 4.2 million barrels.
The following table details the week to week changes for each of the major oil commodities at every level of the supply chain. As shown I have presented a mixed categorization on the week as inventories for gasoline were bullish while crude oil, distillate and Jet Fuel were neutral to bearish. Overall this week's report was marginally biased to the bearish side.
I still think the oil price is overvalued and toppy at current levels as it approaches a key technical resistance area. WTI is still currently in a $90 to $100/bbl trading range while Brent is in a $105 to $115 trading range. There are a lot of dynamics that will impact oil prices in the short term and the ranking of the price drivers are fluid and very susceptible to changing. The only constant for oil prices in the short term is above normal levels of volatility. Geopolitics are currently moving back into the foreground and starting to play a role in price setting once again as well as the perception of more stimulus.
I am keeping my view at neutral with a bias to the bullish side until more clarity emerges from Isaac. The warm weather is also returning and could support prices in the short term. If so the upcoming injections could continue to underperform history and thus result in the overhang of Nat Gas in inventory continuing to narrow as it has been for the vast majority of the injection season to date.
Markets are mostly higher as shown in the following table.
Dominick A. Chirichella
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