USA Could See Strong Hurricane Enter Gulf of Mexico by Mid-Week
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This week, one of Rigzone’s regular market watchers takes a look at hurricane developments, oil and gas price moves, OPEC+ output 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: Oil prices moved lower this week on economic concerns magnified by a decision to increase interest rates by the U.S. Federal Reserve. WTI fell to $82.40 per barrel at one point but managed to move back up over the $83 level. Brent hit two consecutive daily lows of $89.30 before rebounding to over the $90 mark. Early week, traders focused on a report that August permits for new houses were the lowest in two years sparked by increased material costs and higher mortgage rates scaring-off potential buyers. But the main focus this week was on the U.S. Fed as the decision was made to raise the federal funds rate by 0.75 percent in a continuing effort to curb inflation. The higher lending rates have been viewed as stunting economic growth and, in turn, demand for energy. A mostly bearish inventory report added to the downside push. On the bullish front, traders had to consider reports that the output of the OPEC+ group was 3.5 million barrels less than the quota amounts, as well as the possibility of Russia escalating their war with Ukraine.
This week’s EIA Weekly Petroleum Status Report indicated that inventories of commercial crude rose for the third-straight week, adding 1.1 million barrels to 431 million and now just two percent below normal for this time of year. The API reported that inventories rose by one million barrels while the WSJ survey predicted a gain of 2.2 million barrels. Refinery utilization unexpectedly ticked higher to 93.6 percent, up 2.1 from 91.5 percent the prior week. Total motor gasoline inventories increased by 1.6 million barrels to 214.6 million barrels, decreasing to six percent below average. Distillates increased 1.2 million barrels to 117.3 million barrels, now at 18 percent below normal. Crude oil stocks at the key Cushing, OK, hub rose 343,000 barrels to 25 million barrels, or 33 percent of capacity. Imports of crude were 6.95 million barrels vs 5.8 million barrels the prior week, while exports were 3.54 million barrels per day, up from 3.52 million barrels per day the prior week. Exports of refined products were 6.7 million barrels per day. Volumes withdrawn from the Strategic Petroleum Reserve were 6.7 million barrels, which dropped the total inventory to 427 million barrels. Total reserves of the government’s oil, which are at 1984 levels, are now less than the total commercial inventory. The U.S. government has now sold about 218 million barrels in the past year. Meanwhile, the DOE is offering another 10 million barrels of SPR oil for delivery in November. U.S. oil production held at 12.1 million barrels per day vs 10.6 million barrels per day last year at this time. The U.S. oil and gas rig count increased three rigs last week to 763 for the first rise in three weeks. Rates for Very Large Crude Carriers (VLCCs) from the U.S. Gulf Coast to China increased by 39 percent just since early August based upon increasing demand. The UAE has moved-up its target of five million barrels per day to 2025 from an original date of 2030. The Emirates were in a prior dispute with Saudi Arabia over their desire to produce as much as they can while oil is in demand, fearing a global move away from fossil fuels in the future. Seaborne barrels of Russian Urals fell to their lowest level since September despite heavily discounted prices. The pending EU boycott of Russian crude may only worsen their situation.
While hurricane season has yet to impact the U.S. Gulf of Mexico, Hurricane Fiona has her sights set on Eastern Canada which could disrupt a 300,000 barrel per day refinery in New Brunswick. Still, forecasters indicate the U.S. could see a strong hurricane enter the Gulf of Mexico by mid-week. In a major ‘about face’, the UK has lifted the ban on hydrofracturing as the country tries to deal with its energy crisis. All three major stock indexes got pummeled this week on the interest rate hike report and look to settle lower week-on-week. The U.S. dollar gained strength on the inflation-curbing measure which resulted in keeping crude from gaining much ground.
Natural gas broke sharply to the downside on a bearish inventory report and moderating temperatures as we head into the fall season. After rising above $8.00/MMBtu at one point, Henry Hub September NYMEX futures traded down to near $7.00/MMBtu and look to settle lower on the week. The EIA Weekly Natural Gas Storage Report showed an injection of +103 Bcf last week vs forecasts calling for 69 Bcf. Total stored gas now stands at 2.87 Tcf, around -6.4 percent vs year-ago levels and -10.4 percent from the five-year average. There are essentially only five weeks of injection left before the official start of winter on November 1. Weekly injections would now have to average 165 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. U.S. natural gas production last week hit a record high of 100 Bcfd.
The polar vortex is circulating again ahead of the coming winter. The path of the North American Jetstream will determine just how far south this area of frigid temperatures will reach. Early models predict a normal seasonal pattern which will impact the Northeast and Upper-Midwest U.S. mainly.
Rigzone: What were some market surprises?
Seng: While the market has doubted that the OPEC+ group was meeting its monthly output targets, it was surprising to find out just how much they have been missing their self-imposed quotas. The hurricane season looks to be more active than it started as we passed the historical peak last week. An uptick in refinery utilization after reports of weakening gasoline demand was also a surprise.
Rigzone: What developments/trends will you be on the lookout for next week?
Seng: With the current bearish sentiment tied to the economy, traders will have to keep an eye on the possible hurricane development in the GOM next week. If any storms occur that take out production in the Gulf, there's no telling how high crude prices could climb this time.
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