Written Commentary
CRUDE OIL
December Crude Oil was higher early Thursday as the market grew increasingly concerned that the Iranians are stepping up their attacks on shipping through the Strait of Hormuz and with shipping data suggesting a slowdown in the number of ships passing through the strait this week. Attacks last week are estimated between 9-12 vessels, which would be the largest number for any week since the war began. It may also be that the increased number of vessels moving through the strait meant more opportunity to hit targets. There appears to be a slowdown in the number of ships passing through the strait, with data from Kpler indicating 7 vessels transiting on Tuesday and 10 on Wednesday, down from 20 each on Sunday and Monday. However, these numbers do not include the vessels that had their transponders turned off. US crude output is slowing down with approach of Tropical Storm Isaias in the Gulf of Mexico, which is forecast to strengthen into a hurricane before landfall on Saturday. Shell and Chevron said on Wednesday they were curtailing offshore operations in the Gulf, and the Marine Minerals Administration indicated that producers had shut in about 25% of current oil production and 16% of natural gas production as of Wednesday. Axios reported that the Trump Administration was preparing to resume major combat operations against Iran, and news of this only seems to add to supply anxiety at this point. The IEA agreed on Wednesday to accelerate the release of oil stocks and to prioritize diesel supplies. This appears to be a fulfillment of previously announced releases and not necessarily an increase in the total amount.
The weekly EIA petroleum stocks report on Wednesday was supportive to crude oil and not so to gasoline and diesel, as crude stocks fell last week instead of declining as expected, gasoline stocks increase instead of declining, and distillate stocks were down much less than expected. US crude stocks (not including SPR) are above last year and just below the five year average for this point in the season. Gasoline stocks are hovering around historic lows, and distillates are the lowest for this point in the season in at least 1990.
PRODUCTS
Product prices are higher this morning along with crude oil, despite the announcement from IEA on Wednesday that its upcoming release will prioritize diesel. The EIA report on Wednesday showed US gasoline stocks were +400,000 barrels for the week ending October 2 versus an average expectation of -1.7 million, and distillates were -40,000 barrels vs -2.1 million expected. Despite the somewhat bearish numbers relative to expectations, gasoline stocks are still hovering around historic lows, and distillates are the lowest for this point in the season in at least 1990.
NATURAL GAS
November Natural Gas gapped higher early Thursday and reached its highest level since September 25. A slowdown in US production this month has supported a recovery off last week’s lows. LSEG said average gas output in the US Lower 48 states is running around 111.5 bcfd so far this month, down from 113.3 bcfd in August and September (-1.8 bcfd). A force majeure on a pipeline in Appalachia sparked a rally to a two-month high in mid-September, only to have the market back off to near contract lows once flows were restored.
However, since then, other problems have emerged on pipelines that have help pull output down. Average gas flows to the nine large US LNG export plants are running around 16.9 bcfd so far this month, down from 17.9 bcfd in September. This decline (-1.0 bcfd) in offtake is smaller than the decline in output. For today’s EIA storage report, a Reuters report has a forecast for US gas storage to be +79 billion cubic feet for the week ending October 2 versus +64 bcf the previous week, +76 a year ago, and a five-year average of +95 bcf. The hurricane in the Gulf of Mexico is causing offshore gas wells to slow production, but keep in mind most of US production occurs elsewhere. If anything, a storm can hurt demand more than output, as it could result in power outages that reduce gas demand for electricity generation, and it can also interrupt loadings at LNG facilities located around the Gulf. Top Russian and US officials have held talks about bringing a US investor into the Nord Stream pipelines that had delivered gas to Germany before Russia invaded Ukraine as part of a brokered peace deal.
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