Potential Railway Strike Impact Underscores USA Energy Security Weakness

Potential Railway Strike Impact Underscores USA Energy Security Weakness
The potential impact of the railway workers' strike underscored some weaknesses that still exist in U.S. energy security, according to one of Rigzone's market watchers.

(The views and opinions expressed in this article are those of the attributed sources and do not necessarily reflect the position of Rigzone or the author)

This week, one of Rigzone’s regular market watchers takes a look at oil and gas price moves, the potential impact of a railway workers’ strike, the award of 1.7 million acres for bids from an offshore oil and gas lease auction held a year ago and more. Read on for more detail.

Rigzone: What were some market expectations that actually occurred during the past week – and which expectations did not?

Tom Seng, Director – School of Energy Economics, Policy and Commerce, University of Tulsa’s Collins College of Business: Crude oil prices moved up-and-down this week as conflicting signals seemed to appear each day. WTI struggled to continue the rally started last Friday and has fallen back to the $85 mark. Brent approached $90 at one point but pushed back over that mark to just shy of $92. The week started on a positive note as the U.S. dollar retreated and the off-again/on-again Iran nuclear deal was off again. However, higher than expected U.S. inflation numbers propped-up the greenback again causing oil to fall. August inflation was up 8.3 percent from a year ago prompting speculation that interest rates will rise causing reduced economic growth. The weekly inventory report got mixed reactions from traders as the unexpected build was viewed as both bearish and bullish since there had been a large withdrawal from the SPR again. Global supplies remain tight but economic woes have the market viewing less demand going forward. In the U.S., a possible railway workers strike added the prospect of oil and refined product curtailments. Also, halted shipments of coal would cause an increased demand for natural gas for power generation. Additionally, about 70 percent of the ethanol produced in the U.S. is transported by rail which could cause gasoline prices to spike. The Friday strike deadline was averted leading to falling oil prices once again for the week.

This week’s EIA Weekly Petroleum Status Report indicated that inventories of commercial crude rose 2.7 million barrels to 430 million and now just two percent below normal for this time of year. The API reported that inventories rose by six million barrels while the WSJ survey predicted a gain of only one million barrels. Refinery utilization rose 0.6 percent to 91.5 percent, from 90.9 percent the prior week. Total motor gasoline inventories decreased by 1.8 million barrels to 213 million barrels, decreasing to six percent below average. Distillates increased 4.2 million barrels to 116 million barrels, the highest level since February but still 21 percent below normal. Crude oil stocks at the key Cushing, OK, hub saw a decrease of 135,000 barrels to 24.6 million barrels, or 32 percent of capacity. Imports of crude were 5.8 million barrels vs 6.8 million barrels the prior week, while exports were 3.5 million barrels per day, up from 3.4 million barrels per day the prior week. Exports of refined products were 6.3 million barrels per day. U.S. oil production held at 12.1 million barrels per day vs 10.1 million barrels per day last year at this time. Volumes withdrawn from the Strategic Petroleum Reserve were 8.4 million barrels, which dropped the total inventory to 434 million barrels. The U.S. oil and gas rig count fell by five last week to a three-month low of 591. Fourteen fewer rigs are operating over just the past two weeks. Demand for diesel fell last week to its lowest level in almost two years.

The Biden Administration awarded 1.7 million acres for bids from the offshore oil and gas lease auction held a year ago. A federal judge had blocked the sale previously on environmental grounds, but the Inflation Reduction Act required these new sales. All three major stock indexes rallied early week on the lower U.S. dollar only to fall back on the inflation report and a slowing global economy. The rebound in the U.S. dollar also aided in crude’s price slide this week as the greenback looks to settle in positive territory week-on-week.

Natural gas rallied to near $9.25/MMBtu on the rail strike prospect but gave back all gains when the strike was averted. A bearish storage report added to the fall. Still, Henry Hub Natural Gas futures contracts remain above $8.00/MMBtu heading into a ‘shoulder month’ for demand.  The EIA Weekly Natural Gas Storage Report showed an injection of 77 Bcf last week vs forecasts calling for 69 Bcf. Total stored gas now stands at 2.77 Tcf, around -7.4 percent vs year-ago levels and -11.3 percent from the five-year average. There are essentially only six weeks of injection left before the official start of winter on November 1. Weekly injections would now have to average 167 Bcf to get to a total storage level of just 3.7 Tcf. By comparison, last November started at 3.6 Tcf while November 2020 was 3.96 and November 2019 was 3.7 Tcf.

Rigzone: What were some market surprises?

Seng: The potential impact of the railway workers’ strike underscored some weaknesses that still exist in U.S. energy security. Increased pipeline transportation of petroleum, refined products, natural gas and ethanol needs to happen. Also, the European Commission plans to address their energy crisis through demand curtailment by industrials and residents along with a claw-back of what they see as huge profits for suppliers. Add that to the UK’s proposed energy spending cap and you have a dysfunctional energy market at a time when governmental interference is the last thing needed. The lower diesel demand was a surprise given that we still seem to have supply chain issues which can only be alleviated by cargo ships and trucks that run on diesel.

Rigzone: What developments/trends will you be on the lookout for next week?

Seng: U.S. refineries have run hard for the past several months. At some point, they will have to enter ‘turn-around’ to switch to winter gasoline blends and to perform much-needed maintenance. Will we see higher gasoline prices as a result? Or will lower demand for gasoline and diesel offset these outages?

To contact the author, email andreas.exarheas@rigzone.com

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