Which Way Do The Gulf Winds Blow?

By Jonathan Barratt

 

Hurricane Debby in the Gulf of Mexico was a reminder to the market that the US hurricane season has now started and when we combine this with the commencement of the northern hemisphere summer holiday drive-time it should all translate to less supply and/or typically more demand. This should help to support prices for the commodity or push prices higher.

The hurricane season in the US officially starts June 1 and ends November 30^th and with Debby being the first of the season we focus our attention on the expected forecast. According to the National Oceanic and Atmospheric Administration (NOAA) the forecast is for 9 to 15 events this year of which 4 to 8 are expected to become hurricanes with one to three becoming Category 3. Category 3 Hurricanes have winds of up to 125 mph and Katrina in 2005 was the deadliest and most costly of them all. 

The Gulf of Mexico is an important producer and refinery location for oil in the US and any disruption in refining can have an effect on supply and thus price. The region accounts for 29% of total US production and 40% of total US refining capacity. The forecast this season is below the yearly average taken from 1951, however this should not deter any premium if a hurricane develops. Although we appear to have plenty of inventory in place to ameliorate any shut downs in the Gulf the market will still be nervous if a hurricane heads for any platform. It is too early on in the season to turn a blind eye on the hurricane season and we should keep watch on the weather over the coming months.

As the northern driving seasons starts in earnest over the coming weeks we can expect prices to also be supported by this factor. Gasoline prices tend to find their annual peaks during this period. The Memorial Day Holiday on the 28^th May marked the beginning of the summer driving season and the Labor Day holiday at the beginning of September marks the close. So far this year motorists have seen low prices at the pump and we question, as the driving season really takes hold, as to whether or not the low prices will encourage more Americans to take to the roads. A 25% fall in the crude price represents a good saving and we expect demand to be robust, which should support prices.

Remember on the 1^st July the European embargoes commence on imports of oil from Iran and this should further frustrate Iran’s negotiation attempts. It is hoped that the commencement of the European embargo will see the Iranian negotiators coming to the party a little more. However as the P5 have mentioned, time is on the coalitions side and not Iran's. Lets hope Iran does not get too frustrated with the lack of developments. 

Natural gas has reached a five-month high on the back of increased demand; we have taken on a long position at US2.72. Stop is at 2.45. We do have inventory data, which comes out tomorrow evening, and as we have mentioned in previous reports demand appears to be increasing. Although supply is easily on hand we suggested that a fall in builds will get a few short traders nervous and why not? — the market has been depressed for quite some time.

On the WTI/ Brent spread: it is interesting at the moment as a strike in the North Sea is seeing the spread widen. Brent is going bid over WTI. We are long Brent at US90.36 with a stop at US87.20.

Chart Point

We suspect we are getting close to a major low, however we would prefer buying the break higher rather than looking at buying on support. Momentum indicators have not helped us in the past so ignore them for the time being. US77.50 (WTI) is major support.

 

Produced by Jonathan Barratt direct from the trading desks of Commodity Broking Services, Barratt's Bulletin provides expert analysis of commodity markets, global indices and foreign exchange movements. Click here to take a no obligation 21-day trial to Barratt's or to learn more visit www.barrattsbulletin.com. Content included in this article is not by association necessarily the view of FNArena (see our disclaimer).