Written Commentary
Price Overview
The petroleum complex attracted support as fallout from Ida was assessed. The level of damage to offshore wells and the LOOP (Louisiana Offshore Oil Port) was unclear until a fuller assessment could be made and when personnel could begin returning to offshore rigs. Gasoline and heating oil attracted the best support, reflecting fear that widespread power outages in Louisiana would affect at least two Valero refineries that process 335 tb/d of crude and the Philipps Alliance refinery that process 255 tb/d. In additions, the Colonial Pipeline also halted motor fuel deliveries from Houston to Greensboro. The return of these units and others will be watched closely for potential tightness developing in the near term.
Given the decline in inventory levels below the 5-year averages for crude and most products, the market will likely focus on the global supply/demand situation and how the shutdowns will impact inventories over the next few weeks. The potential for larger draws might help underpin values, although concern over infections from the COVID Delta variant will lead to some caution ahead of the OPEC+ meeting scheduled for Wednesday. The meeting is expected to keep oil output policy unchanged, with the continuation of a planned modest production increase of 400 tb/d. In addition, the possibility that higher prices could discourage a recovery in consumption remains as a background consideration.
The DOE report on Wednesday is expected to show crude inventories falling 2.8 mb, distillates of by .6, and gasoline lower by 1.7 mb. Runs were indicated lower by .3 at 92.1 percent.
Natural Gas
Volatility ruled the day as prices opened sharply higher last night with Hurricane Ida making landfall in Louisiana as a category 4 storm and appearing to be on track to have limited effect on LNG infrastructure. The October traded to its intraday high at 4.526 immediately after the reopen, but began to pull back as morning trade picked up steam and initial assesments began to circulate. Extensive power outages, with the state of Louisiana having nearly 50 percent of its population blacked out, raised concerns about ensuing demand destruction in the hurricane’s wake. Forecast revisions added downside pressure as CDD’s decreased substantially in the morning runs, partially due to the storm. Despite the retrenchment, which saw the October trade down to 4.222, prices managed to bounce off those lows to end at 4.305 for a loss of just over 8 cents on the day. With concern already heightened regarding the potentially tight supply situation as we head into winter, the loss of nearly 3 bcf/d in production over the weekend ahead of what is expected to be a smaller than normal storage build this week has done little to alleviate those concerns. LNG flows will need to be watched closely over the next few sessions, and if they come out relatively unscathed from the storm the market could retest the highs in the near term.
Charts Courtesy of DTN Prophet X, EIA, Reuters
The authors of this piece do currently maintain positions in the commodities mentioned within this report.
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