The main drivers for the price of oil have shifted from mostly being driven by the externals (currencies, equities and macroeconomic data) to being driven by the short term fundamentals. Those fundamentals include a hurricane threat in the oil and Nat Gas rich region of the US Gulf Coast, a plethora of unscheduled refinery outages including one at the huge Amuay Refinery in Venezuela, and a breakdown in wage discussions with the Norwegian oil workers union. All of sudden the supply side of the equation could be impacted on both the crude oil and refined products side. The main weather news this morning has been the westerly shifting of TS Isaac over the weekend and instead of disrupting the Republican Convention in Tampa Florida it now seems that it will be disrupting oil and Nat Gas operations in the US Gulf Coast.
Based on the latest update by NOAA Isaac is expected to strengthen to a hurricane by Tuesday and head toward the Louisiana - Mississippi Border making landfall on Wednesday sometime. The oil and Nat Gas industry has already begun to take precautionary measures closing down rigs, platforms and starting the shut down procedure at some refineries. In addition LOOP the large importing facility in the US Gulf is expected to stop operations this afternoon. About 1 million bpd of crude oil is imported through LOOP.
The Gulf is home to 23 percent of U.S. oil production, 7 percent of natural gas output and 44 percent of the country's refining capacity. According to the BSEE (Bureau of Safety and Environmental Enforcement) there is about 334,000 bpd of crude oil or 24% of GOM production shut in and 371 mmcf/d of Nat Gas or 8.24% of GOM production shut in as of yesterday. In addition Phillips66 expects to have its Alliance , La refinery completely shut down by late Monday.
Whether or not there is any infrastructure damage from the storm (hopefully not) there will be an interruption in supply of both crude oil and refined products and at a minimum over the next several weeks there will be declines in both crude oil and refined product inventories. On top of the impact from Isaac is the fire and explosion at the huge Amuay refinery in Venezuela that killed 41 people and for the moment resulted in the shutdown of this facility. As of this morning a fire is still burning in two storage tanks but according to refinery officials the situation is under control. According to Mining Minister Ramirez operations could resume in two days. I am not sure that is for certain and I would keep this event on the radar for the next few days.
So far the reaction to all of the aforementioned events has been somewhat muted on the crude oil side but more pronounced on the refined product side especially for RBOB gasoline which is currently up by about $0.10/gallon as of this writing. WTI is up by about $0.80/bbl while Brent is higher by $0.57/bbl. I interpret the reaction in the market so far as participants are not expecting any major infrastructure damage from the storm and the interruption in supply of crude oil will mostly be from preventive shut-in's only. With the magnitude of the move in RBOB gasoline I would say the market is not convinced that the Venezuelan refinery will in fact resume operation in the next two days.
For now the market has priced in the impact of a preemptive shut-in in crude oil and Nat Gas with all watching closely if Isaac intensifies beyond what is currently projected...a Cat 1 storm... which could then result in possible infrastructure damage. In addition to Isaac there are still two other tropical weather patterns out in the Atlantic as of this morning. Both are still very far away from the US with one having a 30% chance of strengthening into a tropical cyclone over the next forty eight hours and the other just a 10% chance. We are clearly in the midst of what if looking like a very active tropical weather season.
Although today's activity in the oil complex is being driven by all of the above discussed potential fundamentals issues this is also expected to be a week where the stimulus/QE frenzy will rev up as we get to Friday morning's speech at the Jackson Hole Symposium by US Fed Chairman Bernanke. Will he or will he not hint at the next action by the Fed insofar as a new round of quantitative easing is concerned. Also over the weekend Mr. Draghi will also be participating in panel discussions and will he give any signals as to the next action (if any) by the ECB. On top of the lead up to Jackson Hole there will be a considerable amount of potential market moving macro economic data during the week that market participates will be interpreting as for or against more stimulus.
The oil complex ended the week mixed with only minor gains in some of the products in the complex. RBOB gasoline was the main gained while Brent lost a tad on the week. WTI increased while Brent declined this week as US crude oil inventories declined for the fourth week in a row... with crude oil stocks in PADD 2 also declining on the week. The September WTI contract increased by about 0.15% or $0.14/bbl while the September Brent contract ended the week with a decrease of 0.11% or $0.11/bbl. The Sep Brent/WTI spread narrowed by about $0.26/bbl for the week as the normalization process is still interrupted by lower loadings out of the North Sea. I still expect the spread to gradually continue to narrow over the next 6 months as the surplus in the US mid-west is starting to recede from a combination of exports of crude oil out of the region through the Seaway pipeline coupled with refinery utilization rates at the highest level in months.
On the distillate fuel front the Nymex Sep HO contract increased by 0.57% or $0.0175/gal on the week even as distillate fuel inventories increased modestly on the week. Distillate fuel prices have increased by over $0.18/gal over the last two weeks. Gasoline prices increased modestly on the week after the fourth weekly decline in inventories in a row. The Sep Nymex gasoline price increased by 1.67% or $0.0505/gal this past week.
Nat Gas futures continued to lose value for the fourth week in a row although once again this week's decline moderated versus the previous three weeks (likely due to the impending tropical storm). The main weather price drivers are now not as strong as they were earlier in the summer but the weather is projected to remain above normal over a major portion of the US for the next several weeks. The September Nat Gas futures contract decreased by 0.63% or $0.017/mmbtu on the week and is still trading below the key psychological level of $3.00/mmbtu as the market seems to be attempting to settle into a trading range of around $2.65 to about $3/mmbtu.
Thursday's Nat Gas injection report came in well above the market expectations as the temperatures during the report period cooled down. The market sold off very strong immediately after the report and actually tested my technical support level of around $2.66/mmbtu. However, the potential for a tropical weather pattern heading to the US Gulf Coast coupled with a return of above normal temperatures across a major portion of the US for the next several weeks was enough to limit the intensity of the selling with the futures market recovering a major portion of its post inventory report losses with the recovery continuing overnight.
As I have been indicating for the last few weeks Nat Gas futures are settling into a trading range of around $2.66/mmbtu on the lower end to about $3/mmbtu on the upper end. At current prices coal to Nat Gas switching is still economically favorable to Nat Gas but the economics change quickly if Nat Gas prices move toward the upper end of the trading range. Thus the cap on prices. On the other end the warmer weather and the additional demand from coal are serving as the floor in Nat Gas prices for the short to medium term.
On the financial front equity markets around the world were mostly lower for the week in spite of the growing view that more stimulus and a new solution by the ECB is coming. The decline in equities were somewhat limited and mostly impacted by the expectation of some new bold action by the ECB and more easing by the US Fed is still being a possibility as discussed above. Global equity values increased as shown in the EMI Global Equity Index table below and are now solidly in positive territory for the year.
The EMI Index decreased by 1.1% on the week but is still in positive territory for the year by 5%. Over the last week the Index decreased in value in most all of bourses with just one bourse still in negative territory for the year. Over the last several months the global equity markets have been struggling to stay in positive territory but the perception of more potential global easing has moved market participants back into a risk on trading sentiment.
The euro was higher on the week while the US dollar was lower. Last week the global equity markets were a negative price driver for oil and most commodity markets during the second half of the week.
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.
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.
Dominick A. Chirichella
Follow my intraday comments on Twitter @dacenergy.
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