Oil futures got a lift Tuesday as Hurricane Sally neared landfall, forcing the shutdown of around a quarter of offshore Gulf of Mexico crude production and a number of refineries, but analysts said rising worries over the outlook demand may cap potential for upside.
West Texas Intermediate crude for October delivery rose 58 cents, or 1.6%, to $37.84 a barrel on the New York Mercantile Exchange, while November Brent crude, the global benchmark, rose 42 cents, or 1.1%, to $40.03 a barrel on ICE Futures Europe.
Hurricane Sally, a slow-moving Category 2 storm, was forecast to brush the southeastern tip of Louisiana and then blow ashore late Tuesday or early Wednesday near the Mississippi-Alabama state line, according to the National Hurricane Center.
The Bureau of Safety and Environmental and Enforcement late Monday estimated that approximately 21.39% of oil production in the Gulf of Mexico has been shut in, along with around 25.28% of natural-gas production. Reuters reported that the Phillips 66 Alliance oil refinery, which processes 255,600 barrels a day of oil closed on Monday, while Shell cut production to minimum rates at its 227,400 barrel-a-day refinery in Norco, Louisiana.
However, worries remain over the outlook for demand. The International Energy Agency on Tuesday, in its monthly report, said it now expects global demand to fall by 8.4 million barrels this year, a contraction of 300,000 barrels more from last month’s report.
The Organization of the Petroleum Exporting Countries, or OPEC, on Monday again cut its 2020 demand outlook and cut its 2021 demand-growth forecast, citing the continued effects of the COVID-19 pandemic.
OPEC and its allies, a group known as OPEC+, isn’t expected to make any changes when members of a joint committee meet Thursday to discuss its existing program of output cuts. Analysts see room for tension amid recent pressure on prices.
“While Saudi Arabia is appealing for rigorous compliance with the quotas and is threatening rebel members with a price war, growing resentment is evident even among its traditional allies, the UAE (United Arab Emirates) and Kuwait,” wrote analysts at Commerzbank.
“And if this is the case, what is the situation going to be like in countries such as Iraq, Angola or Nigeria, which are not as economically and financially solid as the Gulf states? Sentiment could hardly be worse ahead of Thursday’s meeting. Yet it is not only the status quo that needs to be maintained – actually more pronounced cuts will be needed from October, for demand is considerably weaker than anticipated, according to yesterday’s OPEC monthly report,” they said.