Southern US Damage By Storms
Oil prices fell at the end of last week as severe weather disruptions in the US threaten to deepen the supply glut that has weighed on prices over the last few years. Hurricane’s Harvey and Irma have devastated large parts of the Southern US including Texas and South Carolina meaning there will be a large downshift in demand in these areas. Industry analysts forecast millions of barrels of crude being pushed into storage at a period when storage is already at extremely high levels. Clearly, this will have a negative impact on OPEC’s efforts to rebalance the oversupply in the market by cutting production.
While the local economy is likely to see a gradual return to normal activity once the storms clear, the disruptions caused to demand will likely persist far longer, putting pressure on US prices. In 2005, Hurricane Katrina caused Oil demand to fall 2%, year over year, in the three months after the storm and current projections suggest that the damage this time around will exceed this level.
Estimating The Damage
Hurricane Harvey is widely expected to be among the most financially damaging storms in US history with more than 300,000 houses in Texas damaged or wiped out by the storm. Hurricane Irma is expected to be even more ruinous with CoreLogic Inc forecasting that around 12 million properties are at risk of damage in Florida which again will have a dramatic subduing effect on demand.
Goldman Sachs Forecast 40 Million Barrel Rise in Inventories
Goldman Sachs forecast US crude inventories to rise by over 40 million barrels in the coming month, pushing stockpiles up to nearly 500 million barrels. Inventories had previously been declining over July and August, taken as an encouraging sign by Oil bulls. However, the expected increase of 40 million barrels would negate the drawdowns over this period. At the end of last week, the US Energy Information Administration’s data showed that 4.6 million barrels were added to crude oil inventories in the week ending September 1st.
The longer-term impact of the storms is in the debate, but in the short term, demand will definitely take a hit but if refiners are able to start ahead of projections they could buffer against another surge in US supply.
Will OPEC Cut Production Further?
Traders will be keen to see how OPEC react at their upcoming meeting in November, with potential for further production cuts if prices decline further. A few days ago, Russian energy minister Novak reported that he’d spoken with the Saudi Arabian energy minister regarding the potential for an extension to the production cut deal between Russia and OPEC.
For now, price remains contained within the large contracting triangle pattern that has framed price action for most of this year. A break of the rising trend line support would bring August low of 45.58 into focus as key support, ahead of deeper support at the completion of the symmetry move into 44.63.