Risk Premium Returns
- Prices rise after Iran launches missiles into Israel
- OPEC+ spare capacity softens the price response
- Hurricane Milton bearish for natural gas prices
Sincerely,
Elaine Levin,
President
Powerhouse
(202) 333-5380
The Matrix
On the first anniversary of the Hamas attack on Israel, war continues on multiple fronts. Despite unrest in the Middle East, oil traders had, for the most part, shrugged off any threats to supply. Just recently, WTI crude oil reached a low of $65.27 in September. Things changed last week after a barrage of rockets were launched into Israel from Iran. The risk premium has returned to oil prices for now.
OPEC+ had initially planned to unwind voluntary cuts starting this month. Saudi Arabia and other OPEC+ members have been losing market share as non-OPEC producers increase production. U.S. production set a new record of 13.4 million barrels per day in August – more than any country ever. Gains from other non-OPEC producers and renewables add to the cartel’s headache. China’s economy continues to lag. OPEC+ ultimately decided that any unwinding of cuts needed to be delayed to prevent a further decline in oil prices. Only a week ago, the Saudis threatened that $50 oil could be in the cards if the other members did not stick to their quotas.
Supply risks are being priced in again as traders wait for a response by Israel to the most recent missile attack by Iran. President Biden’s most recent comments, now discouraging Israeli strikes against Iranian oil infrastructure, have failed to stop the “what if” speculation. Fears of disruption of traffic through the Strait of Hormuz or military escalation involving other oil-producing nations have manifested in the form of higher prices.
Iran is currently producing 3.2 million barrels per day and is exporting 1.7 million barrels per day, mostly to China. If all Iranian products were lost (an unlikely scenario), OPEC+ could make up the shortfall.
Excess capacity in the group is estimated to be close to 6 million barrels per day. Saudi Arabia alone could increase production by 3 million barrels per day.
Strong U.S. production and the additional cushion of OPEC+ spare capacity are a primary reason why prices have not moved to the same degree as they did after Russia invaded Ukraine. But that does not mean consumers of energy are without worry. The good news is that diesel and gasoline prices are still below where they were a year ago. Option premiums are also lower after a long period of low volatility. Energy marketers can offer customers pricing programs that allow them to sleep at night without second-guessing if tensions (and prices) simmer down. Contact POWERHOUSE for more information.
Supply/Demand Balances
Supply/demand data in the United States for the week ended September 27, 2024, were released by the Energy Information Administration.
Total commercial stocks of petroleum decreased (⬇) 0.9 million barrels to 1.2671 billion barrels during the week ended September 27th, 2024.
Commercial crude oil supplies in the United States were higher (⬆) by 3.9 million barrels from the previous report week to 416.9 million barrels.
Crude oil inventory changes by PAD District:
PADD 1: Up (⬆) 0.6 million barrels to 8.7 million barrels
PADD 2: Up (⬆) 1.0 million barrels to 103.4 million barrels
PADD 3: Up (⬆) 2.5 million barrels to 237.0 million barrels
PADD 4: Up (⬆) 0.6 million barrels to 22.6 million barrels
PADD 5: Down (⬇) 0.9 million barrels to 45.2 million barrels
Cushing, Oklahoma, inventories were up (⬆) 0.9 million barrels to 23.7 million barrels.
Domestic crude oil production increased (⬆) 100,000 barrels from the previous report to 13.3 million barrels per day.
Crude oil imports averaged 6.628 million barrels per day, a daily increase (⬆) of 171,000 barrels. Exports decreased (⬇) 19,000 barrels daily to 3.878 million barrels per day.
Refineries used 87.6% of capacity; a decrease (⬇) of 3.3% from the previous report week.
Crude oil inputs to refineries decreased (⬇) 662,000 barrels daily; there were 15.691 million barrels per day of crude oil run to facilities. Gross inputs, which include blending stocks, decreased (⬇) 600,000 barrels daily to 16.059 million barrels daily.
Total petroleum product inventories decreased (⬇) by 4.8 million barrels from the previous report week, up to 850.2 million barrels.
Total product demand decreased (⬇) 1,539,000 barrels daily to 19.847 million barrels per day.
Gasoline stocks increased (⬆) 1.1 million barrels from the previous report week; total stocks are 221.2 million barrels.
Demand for gasoline decreased (⬇) 683,000 barrels per day to 8.521 million barrels per day.
Distillate fuel oil stocks decreased (⬇) 1.3 million barrels from the previous report week; distillate stocks are at 121.6 million barrels. EIA reported national distillate demand at 3.638 million barrels per day during the report week, a decrease (⬇) of 384,000 barrels daily.
Propane stocks rose (⬆) 0.3 million barrels from the previous report to 97.8 million barrels. The report estimated current demand at 879,000 barrels per day, a decrease (⬇) of 453,000 barrels daily from the previous report week.
Natural Gas
The natural gas price rally continued last week with front-month futures prices testing $3.00. Market participants will be watching Hurricane Milton, the most recent storm in the Gulf of Mexico. Milton is expected to move east into Florida’s west coast. While there are some oil and gas platforms being evacuated ahead of the storm, the bigger impact to natural gas prices will be to the loss of demand for
cooling and from power outages expected in the storm’s aftermath. Elliott Wave analysis suggests that a pull back in price would be a corrective wave 4 with higher prices still possible.
From the EIA:
- Net injections into storage totaled 55 Bcf for the week ended September 27, compared with the five-year (2019–2023) average net injections of 98 Bcf and last year’s net injections of 87 Bcf during the same week. Working natural gas stocks totaled 3,547 Bcf, which is 190 Bcf (6%) more than the five-year average and 127 Bcf (4%) more than last year at this time.
- According to The Desk survey of natural gas analysts, estimates of the weekly net change to working natural gas stocks ranged from net injections of 49 Bcf to 62 Bcf, with a median estimate of 57 Bcf.
- The average rate of injections into storage is 26% lower than the five-year average so far in the refill season (April through October). If the rate of injections into storage matched the five-year average of 10.5 Bcf/d for the remainder of the refill season, the total inventory would be 3,902 Bcf on October 31, which is 190 Bcf higher than the five-year average of 3,712 Bcf for that time of year.
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