Florida is in the crosshairs of a major hurricane and despite the storm's growing strength, so far the Gulf of Mexico oil production has had no impact, states Phil Flynn of PRICE Futures Group.
While some oil operations in the Gulf of Mexico saw some action to evacuate some personnel out of an abundance of caution, the track of the storm suggests there may be no measurable impact on refineries or production. The same can’t be said for the risk to Florida.
Fox Weather warned, “The time to prepare is over and a dire situation is unfolding along Florida’s Gulf Coast as Category 4 Hurricane Idalia continues to rapidly intensify in the Gulf of Mexico. Catastrophic, life-threatening storm surges and destructive winds will pound the state’s Big Bend region. A storm surge of up to 16 feet in some spots is likely, disastrous winds of up to 130 mph, and a risk of significant flooding are all in the forecast as Hurricane Idalia is fueled by the warm waters of the Gulf of Mexico, according to the National Hurricane Center (NHC). Dozens of counties in Florida are under a state of emergency and evacuations have been ordered in at least 30 counties as fears grow that walls of water will be forced inland as Hurricane Idalia makes landfall according to Fox Weather.
While the focus of the country will be on Florida, the oil market is reacting to the extreme tightening of global supply. The rally in oil is not really about the storm but about the hard reality that we are in a global supply versus demand deficit. The American Petroleum Institute reported a jaw-dropping weekly supply drop of 11.486 million barrels last week. The drawdown was led by another large 2.23-million-barrel drop in the Cushing, Oklahoma delivery point that will put supplies in the hub below 30 million barrels. The draws should continue in the coming weeks but because Hurricane Idalia may slow shipping and exports, we might not get a clear picture as to just how bad things are and how tight supply will become.
As the world sees continued tightening of supply, Saudi Arabia is moving to take full advantage of the situation. Reuters is reporting that “Saudi Arabia may raise prices of all crude grades it sells to Asia in October as the world’s top oil exporter is expected to extend its voluntary output cut for a third month, keeping sour crude supply tight and prices elevated. The October official selling price (OSP) for flagship Arab Light crude could increase by about 45 cents a barrel from the previous month, according to five refining sources surveyed by Reuters, which would be the grade’s highest price so far this year.”
Saudi Arabia knows that the demand for their heavy oil as a replacement for Russian crude and yield more diesel is in such demand they can get away with increasing prices. This is also payback from the Kingdom to the Biden administration which tried to teach the Saudis a lesson by using the Strategic Petroleum Reserve as a weapon because the Saudis failed to raise output when the Biden administration asked them to. That was months before the Ukraine war. That is the reason they also joined the BRICS, the grouping of the world economies of Brazil, Russia, India, China, and South Africa. The pushing away from the US alliance with Saudi Arabia has the Biden team now reaching out to heavy oil producer Venezuela and turning a blind eye to Iran oil sanctions to replace oil that would have come from Saudi Arabia and the US. Of course, the Biden administration thinks the US oil and gas industry is just a bunch of war profiteers and price gougers and buys oil from Iran and Venezuela instead of that pariah state Saudi Arabia.
The American Petroleum Institute did report a 1.4-million-barrel increase in gasoline supplies. Yet we find that our refiners may have to do better than that ahead of the Labor Day holiday weekend. The total demand number for the United States over at Labor Day may come down to what hurricane Idalia does once it crosses Florida. Some models have it going up the coast which could impact the demand for gasoline in Georgia and South and North Carolina. Other models show it then goes out to sea. Keep praying that the storm does the least damage possible.
The American Petroleum Institute did report a welcome 2.46 million barrel increase in distilled inventories. Still, if you look at the overall numbers, we’re still at dangerously low levels but any increase in inventories is welcome.
Natural gas prices are also watching the storm. Major power outages mean a reduction in demand for air conditioning. Yet the possibility of power outages should make us question the wisdom of the Biden administration to try to electrify everything and to try to replace natural gas, which is by far the cleanest burning fossil fuel on the planet. Not only does it not make sense logistically, but it does not make sense from an economic standpoint either. Biden’s Department of Energy backs that up.
The American Gas Association pointed out that–The US Department of Energy (DOE) announced today that natural gas is 3.3 times more affordable than electricity and significantly more affordable than several other residential energy sources for the same amount of energy delivered. The 2023 Representative Average Unit Costs of Five Residential Energy Sources says: (Costs in Dollars per Million British Thermal Units).
The AFGA says that “America’s natural gas is critical to American and global energy security,” said American Gas Association (AGA) President and CEO Karen Harbert. “DOE’s analysis confirms the very clear and substantial cost-advantage of natural gas. Our nation’s domestic abundance of natural gas means American customers pay a fraction of what customers pay for other energy sources here at home and see significant savings compared to energy costs globally. Our industry invests $91 million every day to ensure, that our vast modern delivery infrastructure provides the reliability Americans expect.”
AGA analysis shows that households that use natural gas for heating, cooking, and clothes drying save an average of $1,068 per year compared to homes using electricity for those applications. Natural gas is projected to be half to one-third the price of other fuels through 2050. This affordability is enhanced by successes in energy efficiency. The typical residential natural gas consumer has cut their average fuel use by half since 1970, even as homes have become larger. This is the result of steady improvements in building and appliance energy efficiency, the positive impacts of gas utility energy efficiency programs, and other measures that have contributed to steady improvements in energy efficiency.
“DOE’s findings underscore why it’s essential that consumers have the choice to select natural gas as their energy source” Harbert continued. “Natural gas is not only a low-cost option but also the lowest-emissions resource for most consumers today. The infrastructure that delivers it continues to drive down emissions across the country, and continual innovations in renewable fuel supplies and energy efficiency will provide even more solutions for consumers looking to reduce their emissions cost-effectively.” “Natural gas is responsible for 61 percent of cumulative CO2 emissions reductions from the US power sector since 2005, according to other analysis from the Energy Information Administration,” Harbert said. “This data from DOE underscores how crucial natural gas is for reducing emissions while keeping prices affordable for customers and preserving lifesaving reliability.”
That life-saving reliability may be needed today in Florida.
Learn more about Phil Flynn by visiting Price Futures Group.
