Oil Price Fundamental Weekly Forecast – Prices Nearly Back to Pre-Hurricane Levels

Crude oil futures closed mixed last week due to the impact of Hurricane Harvey. U.S. West Texas Intermediate crude oil finished the week higher and international-benchmark closed the week lower.

October WTI crude oil settled the week at $47.29, down $0.58 or -1.21% and November Brent crude oil finished the week at $52.75, down $0.77 or +1.48%.

WTI crude broke sharply early in the week as one-fifth of U.S. refineries shut down operations in the Texas Gulf Coast area. Although there were no reports of major damage to the refineries, heavy flooding made it nearly impossible to bring in the workers needed to begin production.  At the end of the week, two refineries had been brought back on line. Prices rose late in the week as the news about the refineries calmed fears over fuel shortages.

In other news, with production shutdown, gasoline prices surged to a two-year high. However, by the end of the week, with two refineries restarting, the crack spread, or the difference between crude oil and gasoline prices, fell nearly 11 percent as gasoline prices retreated from two-year highs and demand for crude trickled higher.

The U.S. Energy Secretary approved up to $4.5 million barrels of crude to be released from the Strategic Petroleum Reserve in response to the impact from Tropical Storm Harvey. This was 3.5 million barrels on top of the 1 million barrels of oil approved as of Thursday.

Additionally, according to Baker Hughes, the number of oil rigs operating in the U.S. fields was unchanged from the prior week. The rig count stood at 759, up from 352 a year ago.

Brent crude oil prices soared on August 31 after a Reuters survey showed an accelerating decline in global crude inventories and expectations for an uptick in global demand growth caused analysts to revise their Brent oil price forecasts upwards for the first time in six months.

The poll was carried out before Hurricane Harvey hit U.S. shores, curtailing U.S. refining by a fifth and disrupting offshore production.

The monthly poll of 33 analysts and economists projected Brent crude to average $53.53 a barrel in 2017, slightly higher than last month’s forecast of $52.45.

On August 30, the U.S. Energy Information Administration reported that U.S. crude inventories fell by 3.3 million barrels in the week-ending August 18 to 463.17 million barrels, down 13.5 percent from their record levels last March.

Forecast

The direction of prices is still uncertain, however, as long as the flood waters in the Gulf Coast area continue to recede, I have to lean to the upside.

If the refineries continue to come back on line then demand for crude oil should gradually begin to increase. This should underpin prices. WTI prices are already nearly back to their Friday, August 25 close at $47.87, the day before the hurricane struck.

This week’s EIA report is expected to be a nightmare, however, I think investors know this and are not likely to react to it at all. When the refineries were shut down last week, U.S. inventory was increasing at a rate of 1.4 million barrels per day.

WEATHER NEWS

There is another hurricane brewing in the Atlantic. Hurricane Irma is now a category 3 storm as it tracks across the east-central Atlantic Ocean. The storm will remain a major hurricane, Category 3, or greater, throughout the weekend as it continues to track within a favorable environment. Last this week the storm could veer toward the U.S. East Coast or toward the Gulf of Mexico. It’s likely to still be a strong storm then and will need to be watched very closely.

The U.S. East Coast is a highly populated area so this could affect the demand side if it makes landfall. If it travels into the Gulf of Mexico, it will become a major issue if it makes it all the way up to Texas, Alabama and Louisiana. This is where the platforms and refineries are located.