Three Hurricanes, No Damage

Jim Brown
 
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Hurricanes Igor, Julia and Karl have intensified with Igor and Julia reaching category four status but none of these storms are causing damage, yet.

Igor with winds up to 150 mph and Julia at 135 mph are expected to turn northward and blow across Bermuda but not hit the U.S. coast or the gulf of Mexico. We dodged the bullets once again.

Karl is currently crossing the Yucatan Peninsula and has weakened to an average of 65 mph but is expected to strengthen once it is back over water in the Bay of Campeche before it makes landfall in Mexico. The Mexican offshore oilfields will be blanketed by high winds and heavy rains but the storm is not expected to strengthen enough to cause any material damage.

NOAA Storm Chart

Gasoline imports to the U.S. are expected to slow dramatically now that the summer driving season is over. In August oil companies and traders chartered 21 tankers to transport auto fuel to the U.S. from Europe. That was down from 24 in July. Clarkson Research Services, a unit of the world's biggest shipbroker, said the activity ceased as gasoline inventories in the U.S. rose to 15% over the five-year average in the week ended Sept 3rd.

The arbitrage capability between Europe and the U.S. fell to a spread of only 4.38 cents per gallon and not worth the risk to transport new cargoes. Shipping expenses for an average tanker from Europe to the U.S. Atlantic coast was about $7,739 per day plus fuel costs.

The lack of any major storm in the gulf that shuttered refineries made the import season "rather unremarkable" according to the IEA. Gasoline demand fell to a 23-month low as the driving season ended according to the MasterCard Spending Pulse report. The crack spread for a barrel of WTI crude declined to $4.15 on August 25th and the lowest level since last November 13th.

OPEC sound bites are already making the news regarding the potential for a quota change at their Oct 14th meeting. OPEC president Wilson Pastor said there will be no change in quotas. There are no plans to make future changes in production of prices. "The world economy is growing, it is exiting the recession and as the economy grows, that will go hand in hand with robust growth in oil prices."

Officially no OPEC member has requested an increase in their quota. Compliance with the 4.2 mbpd production cut in 2008 is now at 53%. They don't need to raise quotas because the members are already cheating by 2 mbpd and getting away with it. Oil prices are holding in the mid $70s despite the dismal demand. If demand ever did pickup they can still cheat some more and hold the official headline that they have cut production by 4.2 mbpd. It is all smoke and mirrors and it has supported prices well this time around.

The key will be the amount of oil they can really pump when it is time to raise the quotas. Every OPEC nation is increasing consumption but only a couple are increasing production. I suspect they don't have an extra 2 mbpd in reserve. Saudi Arabia will be the only available reserve production two years from now.

Enbridge has been given permission to restart line 6A on Friday morning so I expect the price of crude will decline sharply before the weekend. This would be a good shorting opportunity with demand dropping and refined product inventories at 20-year highs.

Jim Brown

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