Oil prices surged to the highest level since July after the Energy Information Administration (EIA reported that US crude oil supplies fell for the 6th week in a row, says Phil Flynn of the PRICE Futures Group.
The EIA reported that US commercial crude oil inventories fell by 6.4 million barrels putting inventories are about 7% below the five-year average for this time of year. Hurricane Ida is now Hurricane Nicholas, and both are a factor in those falling supplies but the trend of falling supplies began well before the storms. The comeback of oil and gas production from the storms is the slowest recovery in the history of hurricanes. We did see some significant progress reported yesterday. The Bureau of Safety and Environmental Enforcement (BSEE) reported that 29.52% of Gulf oil production is still shut in. That is the equivalent of 537,193 barrel per day. For natural gas it is 39.40% of production that is still shut in or 878.70 MMCFD.
This situation shows that we have a very tight supply versus demand situation because the supplies are not coming back online fast enough. We're probably going to see a continued price squeeze. Crude oil prices did pull back from the Bolinger band resistance area so more than likely we may consolidate a bit, but we are still on the path to move higher. We have been warning for a long time that there has been significant upside risk in oil prices and we're starting to see that happen now. We are still in the shoulder season and that is giving us a little bit of cover but that does not take away the fact that we are on a path to being undersupplied this winter. Demand is strong but right now it's a supply thing. It is unlikely that the supply will keep up with demand. That means higher prices until demand cools off. Sharply higher prices for energy are becoming a risk to the European economy in the EU and the US economy as well.
China is starting to get nervous about rising food prices and energy prices. China is committed to using its strategic petroleum reserve to try to cool off energy prices, but I think they're going to have a very hard time because it only adds to the demand side of the equation. China thinks they have an answer for that according to Reuters. China will toughen punishments for regions that fail to meet targets aimed at controlling energy use, the state planning agency said in new policy guidelines published on Thursday.
China has been cracking down on high-energy-consuming projects after 20 of its 30 provinces and regions failed to meet energy consumption targets in the first half of the year. National Development and Reform Commission (NDRC) said it would hold local officials accountable for limiting absolute energy use and for meeting targets to cut energy intensity—or the amount of energy used per unit of GDP. The NDRC also said China would improve its mechanisms for setting overall consumption targets and ensure they are distributed fairly across regions. China then will have to balance that clampdown on "excessive demand" and with slowing economic growth.
I think it's clear that China is having a problem with inflation pressures and the fear it's going to hurt their economy. They're getting socked with sharply higher food prices and that's only going to get worse when they have to come in and start buying more of the US crop. As far as energy goes, China's experiment with trying to control prices will ultimately fail and create a situation that is going be a bigger problem for China. In the future, these actions will either lead to sharply higher prices for oil and natural gas or it's going to create a recession. I don't know which way I'd be rooting if I was China right now.
Another explosive day for natural gas! Production in the Gulf of Mexico is adding to a potential supply shortage around the globe. US futures again had another rocketing higher day before the market pulled back a bit and it's not just natural gas that is on fire.
Propane prices have hit the highest level since 2014. For those who haven't filled up their propane tanks, it's going to be extremely expensive. We better hope and pray that we don't get a cold winter this year. Propane prices have risen almost 60% so far and this is small compared to other commodities. Natural gas: +126%, heating oil: +97%, gasoline: +95%, WTI crude: +89%, Brent crude +86%, aluminum: +61%, sugar: +61%, coffee: +52%, copper: +42%, corn: +39%, cotton: +39%, soybeans: +29%, wheat: +26%. On the downside, lumber has fallen -2% and gold: -9%, palladium: -11%, silver: -13%.
Learn more about Phil Flynn by visiting Price Futures Group.