NOTE: I WILL NOT BE PUBLISHING THE NEWSLETTER ON MONDAY DUE TO THE US LABOR DAY HOLIDAY. PUBLISHING WILL RESUME ON TUESDAY
As Isaac moves north market participants once again begin to primarily focus on Mr. Bernanke's Jackson Hole speech this morning ahead of the long holiday weekend in the US. The way the markets traded yesterday I would have said that many players were starting to come to the realization that Mr. Bernanke is not going to announce a new round of quantitative easing. However, overnight the markets started gaining upside momentum and a major portion of yesterday's losses in the equity and oil markets have already been recovered. Thus there is still a modicum of optimism that an new round of QE could be coming today.
I am still of the view that it is a close call and Bernanke and the rest of the Fed are going to wait for more data... in particular next Friday's monthly nonfarm payroll report. The earliest the Fed will announce a new QE program will be at the mid- September FOMC meeting... in my opinion. I would be very surprised if Bernanke jumps the gun today. He is likely to reiterate the main points he has been making for the last several months about the slow growth of the US economy and the faltering jobs recovery. He will likely also go on to say that the Fed still has tools in its tool box and will take the appropriate action if needed. I think he stops at that point in time and focuses the rest of his speech more on the academics and theory of monetary policy. If my expectation of the speech turns out to be the actual outcome I would expect risk asset markets to once again move to the defensive as the vast majority of the gains in many risk asset markets over the last several weeks have been in anticipation of a new round of QE and a new bold solution by the ECB. Those of that view will have to wait until September at the earliest for new monetary action.
On the tropical weather front Isaac is finally moving north but not after dumping a tremendous amount of rain in several of the southern states bordering the Gulf of Mexico. Some areas got over 25 inches of rain. As of yesterday afternoon the BSEE reported about 1.3 million bpd or 95% of GOM crude oil productions is still shut in while 3,263 mmcf/d or 73% of GOM Nat Gas production is also still shut-in. About 1.1 million bpd of refinery capacity is still shut down with flooding reported at Philips 247,000 bpd Alliance refinery. LOOP has not yet set a restart date but they said that they believe they have adequate power for a restart and return to normal operations.
Overall it does not appear that Isaac has caused any lasting damage to producing operations, refinery operations, Nat Gas processing operations nor logistics. The oil and Nat Gas industry is now in damage assessment and safety checking mode. Over the next week or so I would expect the majority of the industry to return to normal operations with minimal glitches or delays. But it will likely be about a week before full operations are returned. I would expect the return of producing operations to occur the quickest while refinery start-ups will lag producing. As power is returned the logistics will quickly be restored to normal operation.
The next storm related impact on prices will likely occur when the next few rounds of oil and Nat Gas inventory reports are released as they will show sizeable inventory declines as a result of Isaac. Due to the US Labor Day Holiday on Monday the API oil report will be delayed until Wednesday afternoon while the EIA oil report will be released at 11 AM on Thursday. The Nat Gas inventory report will be released at its regular time and schedule, Thursday, September 6th. The impact of the storm will clearly show up in the inventory reports with crude oil likely moving to a deficit versus last year while the surplus versus the five year average will narrow significantly. The market may react to this data when it is released.
In yesterday's EIA weekly Nat Gas report they detailed some specifics from the storm and the latest on supply and demand. Natural gas production in the Gulf of Mexico has declined sharply since August 25, when producers began evacuating platforms in preparation for Hurricane Isaac. As of August 29 at 11:30 a.m. CDT, 505 oil and natural gas platforms (almost 85 percent of manned Gulf of Mexico platforms) had been evacuated, according to the Bureau of Safety and Environmental Enforcement (BSEE). BSEE reports that about 3.2 billion cubic feet (Bcf) per day of natural gas production was shut in, about 72 percent of total Gulf of Mexico natural gas production. Approximately 95 percent of Gulf of Mexico oil production was shut in. Gulf of Mexico natural gas production from Louisiana has fallen the most, predictably, as the storm made landfall near New Orleans, according to BENTEK Energy LLC (Bentek). Bentek reports that some offshore and onshore production has continued in Texas.
The Department of Energy (DOE) is providing ongoing situation reports on the status of production, power outages, and oil and natural gas infrastructure in the affected area. As of August 30 at 8:00 a.m., 8 companies had declared force majeure on their natural gas pipeline systems due to production shut-ins, and several others had reported curtailments. DOE also reported that 22 natural gas processing plants are shut down due to Isaac; these plants have a combined capacity of 11.8 Bcf per day.
Total consumption for the report week registered an overall increase, with higher power and industrial sector demand offsetting a decrease in residential/commercial demand. According to estimates from Bentek, domestic natural gas consumption rose by 0.6 percent from last week, driven by an increase of 3.6 percent in power sector consumption. Residential/commercial sector consumption finished the week down 7.4 percent, while industrial sector consumption was essentially unchanged (up 0.3 percent). Although down week-over-week, residential/commercial sector consumption exceeded levels for the same week last year by 2.5 percent.
Total supply for the week was down for the week, registering an overall decrease of 2.8 percent, largely reflecting production shut-ins in the Gulf of Mexico due to Hurricane Isaac. According to Bentek estimates, domestic weekly dry gas production declined 3.3 percent from the previous week's volumes (and was 0.8 percent lower than the same period last year). Imports from Canada rose by 1.6 percent, as an increase in shipments to the Midwest offset decreases in the West and Northeast. For the week, imports from Canada stand close to year-ago volumes (down 0.7 percent). While liquefied natural gas (LNG) sendout rose 26.6 percent over last week, sendout volumes remain well below (28.1 percent) year-ago levels.
As I have been discussing all week the price reaction to the storm for both oil and Nat Gas has been relatively muted. On the oil side the major reaction has been a widening of the RBOB and HO crack spreads due to the large number of refinery outages. The Nat Gas price action has been minimal with the Oct Nymex futures price only higher by about $0.02/mmbtu on the week.
In what I expect to be a light trading session in the US today and one that will grow more illiquid as the day moves on as many players head to wherever they are going to enjoy the long holiday weekend oil most all risk asset market will be driven by the Bernanke speech at 10 AM EST this morning.
I am keeping my view at neutral with a bias to the bullish side until more clarity emerges from Isaac insofar as restarting Nat Gas operations. 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.
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. The first part of this week will be all about the impact of Isaac.
Markets are mostly higher as shown in the following table.
Dominick A. Chirichella
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*Disclaimer: The information in the Market Commentaries was obtained from sources believed to be reliable, but we do not guarantee its accuracy. Neither the information nor any opinion expressed therein constitutes a solicitation of the purchase or sale of any futures or options contracts.