-Demand in Fujairah “has been really, really bad”
-Tensions are running hot in the Mediterranean region.
Crude oil prices were defying logic, posting a slight loss early in the session despite major storm threats to the US oil and gas sector. Forecasters expected Laura to quickly turn into a category 4 hurricane as it bares down on the critical PADD 3. The storm has already come close to shutting in as much as production as Hurricane Katrina did some 15 years ago. Apart from Laura, trading is influenced by US data on oil and petroleum product inventories, though don’t ignore the storage levels off Fujairah. Elsewhere, geopolitical tensions continue to run hot, with Israel setting its sights on Hezbollah.
The spot price for Brent crude oil, the global benchmark, was down some 0.3% to trade at $46.14 per barrel as of 8 a.m. Crude oil prices rallied for much of the week so far on expectations of major shut-ins in the United States. An expected dip in US durable goods orders and breath-holding ahead of the Jackson Hole symposium of the US Federal Reserve may be limiting gains for commodities.
The price of oil was influenced early Wednesday morning by data from the American Petroleum Institute that showed total US commercial crude oil inventories dropped by some 4.5 million barrels for the week ending Aug. 21. Gasoline inventories fell by 6.4 million barrels, though distillates, which includes diesel, increased by 2.3 million barrels. That would normally provide a tail-wind for the price of oil, though expectations of steep drop in US durable goods orders could be capping the gains.
Ole Hanson, a senior commodity analyst at Dutch investment firm Saxo Bank, finds that, even with production down in the United States, demand destruction from the pandemic offsets some of the pressure from the storm. West Texas Intermediate, the US benchmark for the price of oil, is struggling to find bidders.
“It highlights, and in our opinion supports, the view that crude oil may struggle, at least in the short-term, to rally much further,” he stated in a research note. “The pandemic is currently gathering momentum across Asia and Europe and while renewed lockdowns are unlikely, the impact on fuel demand is being felt.”
The forecast from the US National Hurricane Center as of 5 a.m. ET finds Laura is expected to strengthen quickly into a category 4 hurricane. The storm is “forecast to produce a life-threatening storm surge, extreme winds and flash flooding over eastern Texas and Louisiana later today,” the latest report read. Port authorities have already shut down some inbound traffic from the Gulf of Mexico and a bar-napkin estimate finds at least eight refineries, from Total’s Port Arthur, Texas, refinery to Citgo’s 425,000 barrel-per-day facility in Lake Charles, La., are in the process of, or have already, shut down. Roughly half of total US refining capacity is in the path of Laura.
In terms of production, the US Bureau of Safety and Environmental Enforcement finds 1.6 million barrels per day in offshore oil production is offline because of the storm. That represents about 84% of total US oil production in the gulf. Hurricane Katrina, the massive category 5 storm, shut in 90% of gulf production 15 years ago. Traders may have already factored much of that, watching Laura’s development as it crossed the Atlantic. Formal data on US petroleum inventories will almost certainly move the needle later in the day, though the US market is not the global economy. Economists at ING find that manufacturing activity in Singapore has slowed down and GDP is likely to come in at -8.2% in the third quarter. S&P Global Platts, meanwhile, notes that stockpiles off Fujairah were at 26.68 million barrels as of Monday, up 11% from the previous week and the largest weekly gain since late February.
“Demand has been really, really bad, it’s bad for all categories,” a Fujairah-based source told Platts. “It’s been bad for gasoline, bad for gasoil and bad for bunkers.”
Equities and commodities both got a boost early this week on optimism surrounding the so-called Phase 1 trade deal between the United States and China. Apart from economic issues, the rise of China is making the United States nervous, encouraging some analysts to ponder if military conflict is inevitable. Sensing the clash, Chinese Foreign Minister Wang Yi pointed to the US dismantling of the liberal order as the cause of much of the global tension. A new Cold War goes against the grain, he said.
“And I think countries in the world are not going to be behind this mentality,” he added. “Instead we are going to join hand to oppose anyone who is trying to drag us back into that ‘law of the jungle’.”
Elsewhere, there’s no let up in tensions in the Mediterranean region. Turkey continues to take an aggressive posture, sensing a leadership vacuum in the region. With Lebanon hobbled by a weak economy, an even weaker government and the devastation from the massive explosion at the port in Beirut, both Israel and Hezbollah have grown restless. Israel early Wednesday fired on suspected Hezbollah targets near the shared border, an incident the Lebanese government swiftly denounced. Emboldened perhaps by the recent visit by US Secretary of State Mike Pompeo, Israeli Prime Minister Benjamin Netanyahu issued a stark warning to Hezbollah’s paramilitary forces.
“We shall react forcefully to any attack against us,” he said in a statement. “I advise Hezbollah not to test Israel’s strength.”