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Energy Brief Sep 1

Price Overview

The petroleum complex ended near unchanged levels despite ongoing shutdowns of offshore oil platforms and refining capacity due to Hurricane Ida. Problems with infrastructure including power loss in the Louisiana region continue to be a source of uncertainty, but unconfirmed reports that Russia might favor a production increase going forward cast a shadow over the market, despite what was seen as a constructive DOE report and the likelihood that OPEC+ would maintain their current policy. 

It appeared that OPEC+ would stick to their existing policy for gradual oil output increases despite an upward revision in their 2022 demand outlook.  They expect demand for 2021 to increase by 5.95 mb/d following an expansion of 3 mb/d in the first half.  In 2022 they are forecasting an increase of 4.2 mb/d compared to a previous forecast at 3.28. The deficit for 2021 was estimated to be .9 mb/d with 2022 expected at a surplus of 1.6 mb/d compared to their previous forecast of 2.5.  This would imply that OECD inventories would remain below the five-year average until May 2022 rather than the initial forecast for January. 

The DOE report showed crude inventories falling by 7.2 mb/d compared to expectations for a 3.1 mb decline. Refinery utilization declined by 1.1 percent to 91.3 as summer driving begins to wane.  Distillate inventories declined by 1.7 mb while gasoline inventories rose by 1.3. Impressive was product supplied which totaled 22.8 mb/d, an all-time record.  A strong recovery in jet-kero, distillate and propane along with the continued strength to gasoline supplied accounted for the strong showing.  It remains surprising that the reaction to the increasing COVID infections has been muted.  With the impact of hurricane closures still to be reflected in both crude output and refinery production; next week’s figures have the potential to see large draws in inventory levels if disappearance remains firm.  The stable outlook for OPEC and declines in inventory levels should help underpin values on pullbacks toward the 65.00 area basis October crude as the level of damage to infrastructure is assessed and refineries slowly return to production in Louisiana, while 71.00 should pose resistance on the upside.  

Natural Gas

The natural gas broke out to the upside again today as the October contract traded to an intraday  high at 4.706 before ending the session 24 cents higher at 4.615.  Issues with gulf production in the aftermath of Hurricane Ida remain the main catalyst, as output there remains almost entirely shut in.  The problems seem to be stemming from Port Fouchon, which is the support base for the majority of Gulf off-shore operations.  With land based access to port facilities blocked by debris and a complete loss of power, estimates of when it will be up and running again are impossible to pin down.  The fallout effects everything from the flow of product from the Gulf to the ability to transport crew back out to the offshore rigs.  As the outages extend, concern obviously grows regarding the storage situation ahead of winter demand season.  LNG flows upticked today but have shown a small contraction since the storm, although not enough to offset supply losses.  The strength in prices is not surprising, but overextended after stop-loss buying was triggered above 4.50 and likely initiated algorithmic piling on.  We have now traded into the November/December 2018 price zone which peaked out at 4.929.  Tomorrow’s storage report is estimated to show a 25 bcf injection, well below the 5 year average of 53.  Any surprise to the high side could lead to a rapid retrenchment, with 4.40 as the first area of support.   

Charts Courtesy of DTN Prophet X, EIA, Reuters

 

The authors of this piece do currently maintain positions in the commodities mentioned within this report.

Futures and options trading involve significant risk of loss and may not be suitable for everyone.  Therefore, carefully consider whether such trading is suitable for you in light of your financial condition.  The information and comments contained herein is provided by ADMIS and in no way should be construed to be information provided by ADM.  The author of this report did not have a financial interest in any of the contracts discussed in this report at the time the report was prepared.  The information provided is designed to assist in your analysis and evaluation of the futures and options markets.  However, any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to ADMIS. Copyright ADM Investor Services, Inc.

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