Oil Prices Were Hit Hard on Stormy Seas

Oil prices were hit hard on stormy seas as macroeconomic fears have overcome concerns about a supply shortage, at least for yesterday, says Phil Flynn of the PRICE Futures Group.

Macro worries about the fallout from a possible default in China, fears that the US might not raise the debt ceiling, and uncertainty about the upcoming Fed meeting caused Monday's meltdown. Yet it's almost becoming cliche that after a hard sell-off on Monday to have a rebound on turn-around Tuesday.

Oil prices are trying to bounce back after being under pressure because of the concerns about China's economy due to the possible default of China’s biggest property developer. The company is named Evergrande and has $300 billion in debt and is due to pay out interest worth $83 million on a 5-year US-dollar denominated bond, with an initial issue size of around $2 billion. There are fears of a possible default, especially if the Chinese Government fails to bail them out. Those concerns had people running for haven protection in the dollar put downward pressure on a lot of commodities.

Many believe that China will step in and try to buffer the situation to avoid a larger fallout from a default. Yet S&P rating services isn't so sure because China has not made it clear whether or not they are going to step up to avoid the default. There has been a lot of planning surrounding this possibility for some time. Chinese key stocks are holding value, so there is a sense that this will not be a Lehman moment.

The potential fallout for the rest of the Chinese economy has overshadowed the possibility of energy shortages in Europe and Asia and maybe here in the United States. Reports that US oil and gas production in the Gulf of Mexico may be down longer than anyone had anticipated could raise some real concerns about shortages of supply in the future.

Reuters reported that Royal Dutch Shell, the largest US Gulf of Mexico oil producer, said damage to offshore transfer facilities from Hurricane Ida will cut production into early next year, slashing deliveries of a type of crude oil prized by refiners. Reuters says that Shell was the hardest-hit producer from Ida, which tore through the US Gulf of Mexico last month and removed 28 million barrels from the market. The ongoing disruptions have hampered exports and raised crude prices, as Asian buyers searched for substitutes for the popular Gulf Mars grade.

Reuters says, “Three weeks after the storm, about 40% of Shell's production from the offshore region is still offline. Shell is the largest US Gulf producer with eight facilities pumping about 476,000 bpd, according to researcher Rystad Energy. Overall, the US Gulf produces 1.8 million bpd, or about 16% of US oil output.”

For the crude oil and natural gas markets, unless we see a major market meltdown or a major rally in the dollar, this weakness should be an opportunity to lock in prices for the winter months. We've been warning about the upside risk in both oil and natural gas prices, and we still believe it’s going to be a problem going into winter. There is the potential for sharply higher prices especially if we get a cold winter. Don't make the same mistake that Europe did and not be prepared.

Learn more about Phil Flynn by visiting Price Futures Group.