Crude oil prices got hammered as record long hedge funds wanted to book profits on the last day of the month. Hedge funds wanted to take profits because despite the big price drop yesterday, the month of August gave oil its first up month after two down months. Oil did see the pressure increase after a headline increase in crude supply on the weekly inventory but a drawdown in Cushing, Oklahoma. We also saw strong refinery demand and a storm in the Gulf of Mexico that should have made that draw seem a little smaller. As we start early trading on a new month, we are seeing some buying come back in as we look to September with a lot of events that may send oil on a big move one way or another.
Today we have a very important jobs number that may be the deciding factor in an increasingly “hawkish” Fed as to whether they can raise interest rates in the month of September or even in this year.
Saudi Arabia is raising eyebrows with comments that seem to be conciliatory but at the same time may be a veiled threat to other oil producers that may be wavering on the Saudi “suggestion” to freeze global output. Then the 12 OPEC members will meet informally in Algiers on the sidelines of the International Energy Forum (IEF) Sept. 26-28. The big dog Saudi Arabia seems to be putting its best foot forward as the energy minister Khalid Al-Falih is boosting prices by saying that Saudi Arabia wont flood the market with oil and “there is no price war”.
Of course that almost seemed like a veiled threat. Iran and Libya said that if they don’t want to freeze output that Saudi Arabia could do 12.5 million barrels of oil per day if they wanted. In other words, if they want a price war, then Saudi has more ammunition in the tank and that they are showing restraint even at their record production levels. If they want a war, the Saudis could raise output to capacity and bury oil prices and Iran and Libya’s economy at the same time. It reminds me of the old Crocodile Dundee movie when a robber tried to rob him with a knife and he said, that is not a knife, this is a knife and pulled out a much bigger weapon.
Crude oil also saw some weakness as tropical storm Hermine will miss key production areas and the ability of oil and gas producers to already bring back a little bit of shut production. The Bureau of Safety and Environmental Enforcement (BSEE) from operator reports, it is estimated that approximately 19.52 percent of the current oil production in the Gulf of Mexico has been shut-in. It is also estimated that approximately 10.59 percent of the natural gas production in the Gulf of Mexico has been shut-in. That is down from 22% on oil.
Oil prces also focused yesterday on a headline crude build of 2.3 million barrels. Yet in Cushing, Oklahoma we saw crude supply fall by 1.003 million barrels. That was a much bigger drop that anticipated. Most of the crude build was in the Gulf Coast which should reverse next week as weather will slow imports. U.S. crude oil production fell by 698,000 barrels last week and refinery runs came in at an impressive 92.8% of capacity. Gasoline fell by 700,000 barrels and distillates increased by 1.5 million barrels. Of course for hedge funds, the reports always look more bearish at closing times and month’s end.
Natural gas came back up as that market is more sensitive to tropical storm Hermine. With Injections all summer coming in pretty much below average, even the loss of some Gulf of Mexico gas is going to tighten supply. Couple that with forecasts for above normal temperatures in the month of September and the risk of falling production this market could be getting ready for an upside breakout.
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