Tropical Storm Gordon helped oil get ahead of itself, and now oil is being weighed down by a strong dollar, in part inspired by emerging market concerns. Tropical Storm Gordon hit land just short of being a category 1 hurricane and brought heavy rain, but no reports of any major damage to refineries or production platforms. We did see some shut-ins, but it was clear later in the day yesterday that the storm concerns were only a coming attraction for where oil will again eventually trade. Yet, concerns that at first raised concerns about production destruction to demand destruction which happens so many times during these storms.
Oil also felt pressure after the private forecaster Genscape showed a larger than expected increase in crude supply at the Cushing Oklahoma delivery hub. They reported that crude supply increased to 27,424,310 barrels in storage up from Friday, Aug 24 by 753,863 barrels. The increase is causing some to raise their forecast for this week’s inventory report that was delayed because of the Labor Day weekend. Tonight, we get the American Petroleum Institute (API) report that probably set the stage for a price comeback as it will be a reminder that based on demand, we are still going to be in a tight market as we head towards the end of the year.
The US dollar looks to be the safe haven play as turmoil in emerging markets is causing the greenback to reign supreme and pressure most commodities, oil included. First it was Turkey, than Argentina and now many emerging markets are trading scared. Bloomberg News reported that the rout in emerging markets showed no sign of letting up, with most currencies weakening and an index of stocks nearing a bear market.
“South Africa’s Rand led the sell-off, falling to the lowest level in more than two years, followed by Mexico’s Peso. The MSCI Emerging Markets Index of shares dropped for a sixth day, set for its steepest slide in three weeks. Worst-hit was Indonesia, where shares tumbled the most in three years amid concerns the depreciating Rupiah will lead to higher corporate borrowing costs.” The emerging market fears are being overplayed and we will find some stability soon. When that happens, we expect the dollar to pull back and support oil and other commodities.
Tropical Storm Gordon sure cooled down natural gas prices. Andrew Weissman, of EBW Analytics, pointed out that front-month natural gas posted its largest one-day decline since February on Tuesday, following the formation of fast-developing Hurricane Gordon and another all-time production record notched over the holiday weekend. Although the impact of Hurricane Gordon may dominate the near term, over the next 30-45 days a combination of rising production, declining storage deficits, and falling demand, in both the power sector and LNG exports, is likely to lead NYMEX natural gas futures lower. Surging production—particularly the pace at which new Appalachian takeaway capacity fills—will be central to the NYMEX natural gas trajectory this fall, with impacts on both physical fundamentals and the pricing of winter contract risk premiums. A new white paper underscores the price-deflating impact of surging renewable generation on wholesale power prices in California. `
Use the storm weakness to buy calls on oil and products and stay short on natural gas.