Bubblin' Crude.

Crude oil is bubbling and perhaps getting ready to boil over! It’s the fundamental picture for oil that is becoming more bullish by the day. Oil prices are breaking out to the upside on concerns about a slow recovery in U.S. production. There are energy shortages in Europe due to failed solar energy causing record-breaking natural gas prices along with more tropical storm activity in the Gulf of Mexico. We have been warning people to make sure that they get hedged on products, both petroleum and natural gas and we continue to stress that there are significant upside risks in these markets.

The U.S. energy industry made some progress on bringing back oil and gas production in the Gulf of Mexico over the weekend but there are also reports of significant damage. That means we won’t see production come back on for months possibly. What that means is we’re going to continue to see a tighter supply of both oil and natural gas and that’s going to be supportive especially as we get into the higher demand months called winter.

As of Sunday, the Bureau of Safety and Environmental enforcement reported that 48.56% of Gulf oil production is offline and 54.39% of natural gas. Despite the progress, this is still one of the slowest recoveries in hurricane history as far as Gulf oil production has been concerned. This is going to add to the U.S. supply deficit and is raising concerns about sharply higher prices as we go into winter.

Accuweather reports that a hurricane watch was issued for parts of the Texas Gulf coast Sunday night as Tropical Storm Nicholas lurked in the southwestern Gulf of Mexico. AccuWeather forecasters expect the storm to bring flooding downpours from northeastern Mexico to New Orleans, with the most significant flooding expected around the Houston area early this week. As of 5 a.m. EDT Monday, Nicholas was located about 200 miles south of Port O’Connor, Texas, and 45 miles southeast of the mouth of the Rio Grande River. The storm had maximum sustained winds of 60 mph and was slowly moving to the north at a speed of 14 mph. Tropical-storm-force winds extend outward up to 115 miles from the center of Nicholas. The hurricane watch covered areas from Port Aransas to Freeport, Texas, while a tropical storm warning was in effect for the coast of Texas from the mouth of the Rio Grande to High Island, Texas, the National Hurricane Center (NHC) said. A tropical storm watch was issued for areas from the mouth of the Rio Grande to Port Aransas, Texas, and storm surge warnings were in place for parts of the Texas coast. Forecasters have been closely monitoring Nicholas since it was a tropical wave.

Natural gas prices are still very high with shortage concerns around the globe. We’ll get a preview of what Joe Biden’s energy policy is going to look like in a few years by looking at Europe. The Wall Street Journal reports the EU’s heavy reliance on wind power, coupled with a shortage of natural gas, has led to a spike in energy prices. In a must-read, the Journal wrote that natural gas and electricity markets were already surging in Europe when a fresh catalyst emerged: The wind in the stormy North Sea stopped blowing. The sudden slowdown in wind-driven electricity production off the coast of the U.K. in recent weeks whipsawed through regional energy markets. Gas and coal-fired electricity plants were called in to make up the shortfall from the wind.

Natural-gas prices, already boosted by the pandemic recovery and a lack of fuel in storage caverns and tanks, hit all-time highs. Thermal coal, long shunned for its carbon emissions, has emerged from a long price slump as utilities are forced to turn on backup power sources. The episode underscored the precarious state the region’s energy markets face heading into the long European winter. The electricity price shock was most acute in the U.K., which has leaned on wind farms to eradicate net carbon emissions by 2050. Prices for carbon credits, which electricity producers need to burn fossil fuels, are at a record too.

EBW Analytics says that last week natural gas shook off a bearish Weekly Storage Report to rise above $5.00/MMBtu in September for the first time since 2008, before retreating on Friday. Technicals suggest the October contract may run towards $5.11-5.13/MMBtu, but the arrival of Tropical Storm Nicholas along the Texas Gulf Coast early this week may interrupt both spot market demand and bullish momentum. After spiking $1.087/MMBtu (28.2%) in three weeks, natural gas is liable to correct lower at any point. Still, 1.21 Bcf/d of supply are offline post-Ida and recent gains remain fundamentally justifiable from a medium-to-long-term seasonal standpoint.

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Thanks,

Phil Flynn