Oil Prices Rise as Hurricane Season Disrupts U.S. Supply

Oil prices rose Tuesday, clawing back some of their losses from recent weeks, with U.S. hurricane season limiting supply from the Gulf of Mexico.

Before paring some gains, West Texas Intermediate futures, the U.S. benchmark, rose 1.7% to $37.86 a barrel, and global benchmark Brent crude rose 1.4% to $40.15 a barrel.

The International Energy Agency said that precautionary shut-ins prompted by Hurricane Laura cut U.S. supply by 400,000 barrels a day in August. Meanwhile, it now expects global oil demand to contract in the last three months of the year by 5 million barrels a day -- some 600,000 barrels a day deeper than forecast last month.

The IEA's assessment and the prospect of more storms in the coming weeks have helped drive prices higher, said Bjørnar Tonhaugen, head of oil markets at consulting firm Rystad Energy.

"Harsh weather events in the U.S. cause some unpredictability about its oil production and that's always good news for prices," he said.

Relatively upbeat Chinese economic data -- industrial production and retail sales figures beat expectations -- and their buoyant effect on the yuan versus the dollar were also behind rising oil prices, said Ole Hansen, head of commodity strategy at Saxo Bank.

China is the world's largest oil importer, and as oil is denominated in dollars, a weaker greenback makes crude less expensive for holders of other currencies.

Oil's rally came despite a broadly downbeat report from the IEA, in which it forecast a sharper fall in global demand in 2020 than in its last report, deepening its contraction expectation for the second consecutive month. The Paris-based agency now expects global demand to fall by 8.4 million barrels this year, 300,000 barrels more than forecast in its previous monthly market report.

Rising Covid-19 cases in Europe, new restrictions and high levels of working from home, as well as increased use of personal vehicles, has made analyzing the market very challenging, the IEA said.

Some inventories have fallen, with the amount of oil in floating storage dropping in August. However, a deepening contango, in which prices are higher for longer-dated contracts, suggests underlying weakness in the physical oil market, the IEA said. Other metrics, such as stock levels in Organization for Economic Cooperation and Development countries, showed an increase in July back to record highs.

The IEA also said Chinese purchases of oil for September and October have slowed, leading to a glut of unsold barrels. With refinery margins persistently weak, trading houses are again looking to charter ships to store crude, the agency said.

The Organization of the Petroleum Exporting Countries deepened Monday its own demand contraction expectations and signaled growing pessimism about the global economic recovery.

Investors are also eyeing the OPEC+ alliance of oil-producing countries ahead of its committee meeting this week. The group has in recent months curbed some of the production cuts it agreed on this year, and while some reports have noted a slip in the cartel's compliance, the IEA put compliance at 97% in August.

"Ahead of such meetings, traders traditionally boost prices on anticipation that the group may decide to take new action," said Rystad Energy's Mr. Tonhaugen.

Write to David Hodari at David.Hodari@dowjones.com

By David Hodari

Oil prices rose Tuesday, clawing back some of their losses from recent weeks, with U.S. hurricane season limiting supply from the Gulf of Mexico.

U.S. crude futures rose 2.7% to $38.28 a barrel, paring some of this month's losses that have dragged oil down from its highest level since early March in the low $40s a barrel. Prices started the year above $60, then briefly tumbled below $0 in April with the coronavirus eroding demand. On Tuesday, Brent crude, the global gauge of prices, advanced 2.3% to $40.53 a barrel.

The International Energy Agency said precautionary shut-ins prompted by Hurricane Laura cut U.S. supply by 400,000 barrels a day in August. Meanwhile, it now expects global oil demand to contract in the last three months of the year by 5 million barrels a day -- some 600,000 barrels a day deeper than forecast last month.

Tuesday's moves came with 27% of total offshore oil production in the Gulf of Mexico halted due to Hurricane Sally, according to the Bureau of Safety and Environmental Enforcement. The Category 1 storm is expected to make landfall likely in Alabama on Wednesday morning and hit the area with strong wind gusts and flooding.

The IEA's assessment and the prospect of more storms in the coming weeks have helped drive prices higher, said Bjørnar Tonhaugen, head of oil markets at consulting firm Rystad Energy.

"Harsh weather events in the U.S. cause some unpredictability about its oil production and that's always good news for prices," he said.

Relatively upbeat Chinese economic data -- industrial production and retail sales figures beat expectations -- and their buoyant effect on the yuan versus the dollar were also behind rising oil prices, said Ole Hansen, head of commodity strategy at Saxo Bank.

China is the world's largest oil importer, and as oil is denominated in dollars, a weaker greenback makes crude less expensive for holders of other currencies.

Oil's rally came despite a broadly downbeat report from the IEA, in which it forecast a sharper fall in global demand in 2020 than in its last report, deepening its contraction expectation for the second consecutive month. The Paris-based agency now expects global demand to fall by 8.4 million barrels this year, 300,000 barrels more than forecast in its previous monthly market report.

Rising Covid-19 cases in Europe, new restrictions and high levels of working from home, as well as increased use of personal vehicles, have made analyzing the market very challenging, the IEA said.

Some inventories have fallen, with the amount of oil in floating storage dropping in August. However, a deepening contango, in which prices are higher for longer-dated contracts, suggests underlying weakness in the physical oil market, the IEA said. Other metrics, such as stock levels in Organization for Economic Cooperation and Development countries, showed an increase in July back to record highs.

The IEA also said Chinese purchases of oil for September and October have slowed, leading to a glut of unsold barrels. With refinery margins persistently weak, trading houses are again looking to charter ships to store crude, the agency said.

The Organization of the Petroleum Exporting Countries deepened Monday its own demand contraction expectations and signaled growing pessimism about the global economic recovery.

Investors are also eyeing the OPEC+ alliance of oil-producing countries ahead of its committee meeting this week. The group has in recent months curbed some of the production cuts it agreed on this year, and while some reports have noted a slip in the cartel's compliance, the IEA put compliance at 97% in August.

"Ahead of such meetings, traders traditionally boost prices on anticipation that the group may decide to take new action," said Rystad Energy's Mr. Tonhaugen.

Amrith Ramkumar contributed to this article.

Write to David Hodari at David.Hodari@dowjones.com


  (END) Dow Jones Newswires
  09-15-20 1042ET
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