The following article was written by Ipek Ozkardeskaya, Senior Market Analyst at FCA regulated broker London Capital Group Holdings plc (LON:LCG).
Ipek Ozkardeskaya, LCG
Hurricane Harvey has taken its toll on the oil prices. It is said that Texas – Louisiana borders has been hit by the strongest storm in more than five hundred years.
Heavy floods caused disruption and shutdown in oil refineries. The hurricane halted twenty percent of the activity in Gulf of Mexico and ten percent of the total activity in US refineries.
The WTI crude oil made a timid upside attempt at the announce of the storm, as reduced activity would push oil prices higher, then plunged as damages caused an important slide in crude oil demand.
The gap between the WTI and Brent crude first widened, then the Brent crude also came under pressure as the hurricane reenergized. Damages are wider than anticipated and the interruptions last longer than expected.
The situation in oil refineries are reflected by higher consumer prices. In fact, the halt in the refineries caused more than 3% rise in motor fuel prices in New York. This situation could cause a temporary rise in the consumer inflation and estimated 0.2% decline in quarter’s GDP, according to latest news.
The WTI crude is under the pressure of a lower demand and the current downside trend could pull the price of a barrel below the $45 level. The downside potential is contingent on the severity of the storm and the gravity of the damages.
Given the temporary nature of the major driver, the market should start binding its wounds as soon as the damages are correctly priced in. With the anticipated pick-up in demand, the WTI crude should, in theory, return to the pre-hurricane levels. This would be roughly around $48/barrel.
Zooming out of the US
OPEC and its allies didn’t comment on their production cut plans at their most recent meeting in Vienna. OPEC officials’ prospects of higher global demand have not been priced in extensively, and the goal of reducing the supply to the five-year average by the first quarter of 2018 appears to be unachievable to many analysts.
The OPEC and co. will discuss the future of supply cuts at their November meeting. It is important to note that the local supply cuts have not improved the oil prices to the anticipated levels in the global markets. We remind that the OPEC was targeting the $60 level per barrel by the end of this year.
Unfortunately, failure to sustain the positive price trend, combined with lower volumes, weigh on producers’ finances. The risk of non-renewal is plausible and therefore investors are much concerned by the intermediate OPEC meetings, which could hint at whether the oil producers are willing to persist on cutting supply until they reach their goal or terminate the agreement and let the competition take over the market.
On the other hand, the US oil production advanced to a fresh historical high in August. The US refineries produced 9.5 million barrels per day before Hurricane Harvey hit the Texas – Louisiana coast. The record US production is unavoidably pressuring the global prices on the downside and harden the OPEC and its allies’ task in balancing the market.
As now, there is little incentive for investors to increase their long positions in oil. The CFTC data suggest that the speculative long positions are still relatively high, which means that there could be more potential on the sell side.
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