Another 6.2% drop in the Shanghai composite helped drive oil and industrial metals to a six-year low, and only seemed to slow after China pumped 120 billion yuan ($18.77 billion) worth of seven-day reverse repurchase agreements, or reverse repos), which are a short-term loans to commercial lenders in the money market. The flooding of cash into the market stopped a major selloff in oil but it was not enough to turn this market's fortunes just yet.
Yesterday, the front month September contact closed under $42 per barrel as the option expiration selling wiped away its premium over support. Now, with October being the front month you have that technical dilemma on whether the real support was breached or it was just a fluke. That is not saying the fundamentals look very bearish at the moment with the key issue being China and its slowing economy.
Yet, we know that China hitting the market with stimulus can change the fortunes of oil. In fact, in the depths of our own financial crisis and the last time oil traded into the $30's. At that time many were predicting the pain to continue yet the quantitative easing put in place by the Federal Reserve created a bottom and improved oil demand. One might wonder if China's move to pump money into its system will have the same effect on prices as well?
Gas prices in the Midwest continue to spike as reports of shortages in key wholesale markets are driving price spikes. The BP refinery, which completed a major overhaul back in 2013, has been plagued with issues with its Crude Distillation Unit (CDU)--the unit that pre-refines sour and heavy crude so it can be run through a regular refinery and turn it products. Whiting BP moved to overhaul its refinery so it could refine these cheaper grades of crude they had no idea of the coming shale oil revolution. If they did they might not have done it.
Back in 2012, BP filed a contractor lawsuit alleging that some of its contractors used effective fireproofing and negligence, including damage claims for "loss of use." They said that thousands of tons of new structural steel that was required for the overhaul was coated with a fireproofing material called Procreate 241, which was "degrading prematurely and causing damage to BP's property."
Back In February, the CDU unit was shut for a time perhaps foreshadowing the issues we have today. There are questions regarding whether BP will have to start from scratch and totally reassemble this unit which could take many months and lead to long-term high gas prices for the Midwest. I kind of wish that they did not retool that refinery as well.
A big move forward in arctic drilling. The Wall Street Journal reports that "The U.S. government on Monday gave Royal Dutch Shell a final green light to drill for oil and natural gas in the Arctic Ocean, providing the company a long-sought victory and escalating a battle with environmentalists over President Barack Obama's climate and energy agenda.
The Interior Department said it has issued a permit to Shell to drill an exploratory well into oil-bearing zones in the Arctic Ocean. In July, the department had issued a permit that allowed the company to drill to only the top of such zones because it didn't have a particular emergency response vessel on hand, which is now present in the region.
"Activities conducted offshore Alaska are being held to the highest safety, environmental protection and emergency response standards," said Brian Salerno, director of the Interior Department's Bureau of Safety and Environmental Enforcement. "We will continue to monitor their work around the clock to ensure the utmost safety and environmental stewardship."
The Interior Department in May conditionally approved Shell's drilling plans, but said the company needed several other government permits before it could move forward. The company has until late September to drill before ice in the frigid waters makes it too difficult to drill, according to a spokesperson.