In addition to the fundamentals that traders should normally follow to evaluate the oil market, another aspect that gained relevance at this time of year were climate forecasts, in particular, Gulf of Mexico.
The two most important factors in the direction of oil prices this week are North American oil production and the U.S. stock market. West Texas Intermediate and Brent rose on Wednesday morning, while traders reacted to the North American Petroleum Institute (API) forecasts that showed a withdrawal of 8.1 million barrels of oil stocks in the U.S. The prices were also impacted by the data of the International Energy Agency (IEA) on Wednesday, which revealed that crude oil stocks had, in fact, suffered a drop of 9.5 million barrels last week.
However, traders should not take their eyes off the Gulf of Mexico for the rest of this week and the next, as an important climate event – called "Tropical Storm Barry" when its wind gusts reach 65 km/h – can impact oil production, U.S. exports and imports, in addition to prices.
The expectation is that the tropical depression that is forming in the Gulf of Mexico gains enough force to become a tropical storm and perhaps a hurricane this weekend. Most likely, the area where several large refineries in the U.S. is located, as well as important ports between Houston and new Orleans. In fact, this shoreline is responsible for more than 45% of all U.S. refining capacity. There is also the expectation that the storm will generate floods, which, as we learn from Hurricane Harvey, in 2017, can disrupt refining and transportation activities during large periods of time.
It is not my intention to predict exactly how any particular storm in the Gulf of Mexico will affect prices and the oil industry, but traders should keep an eye on the following key issues:
- Interruption of offshore oil production
One-third of North-American oil production on the offshore is already stopped due to the imminent storm. About 16% of all oil production in the U.S. is made by offshore perforations.
- Refineries damaged and out of operation
Refineries in the affected areas may be out of operation in the short or long term as a result of the storm and subsequent flooding. In 2017, a flood caused by Hurricane Harvey forced Motiva, the largest U.S. refinery, belonging to Saudi Aramco, to be closed for two weeks. It took several months for the flood damage to be completely repaired.
For this storm, some meteorologists have predicted up to 100 cubic centimeters of precipitation. The production of gasoline and distillerates can be impacted, as well as petroleum stocks in the USA. If the refineries cannot process crude oil, without the majority of oil production being affected, the result would be a large accumulation of oil stocks in the weekly data released after the hurricane.
- Suspension of imports and exports
The closing of ports and pipelines due to floods and other storm damage can also cause a larger accumulation of oil stocks in the U.S. U.S. oil exports are already an important part of world oil trade. Most of the U.S. oil is exported from the ports in Houston, Galveston and the Louisiana offshore oil port. Oil exports (and imports) should be interrupted during periods of bad weather and, in some cases, flooding may cause a port to be inoperable for days or weeks after the storm passes. With extreme floods, we can see a temporary drop in U.S. oil exports in weekly and monthly export data after the storm.
Traders and market observers should keep in mind these issues throughout the U.S. hurricane season, which goes from May to November, with peak between August and October. However, each hurricane has its own peculiarities. Path, wind strength, speed and precipitations can impact regions differently. For example, a storm may force the closing of ports and the interruption of offshore perforations for a long period of time, but refineries may be intact. The oil stock numbers would not be affected in this case, because the drop in production would be compensated by the decline in exports, and vice versa. Whatever the case, prepare yourself for a difficult journey this season of drilling.
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