Oil prices rose sharply on Thursday, continuing their rebound as Hurricane Francine disrupted U.S. oil production in the Gulf of Mexico. The hurricane, which made landfall in southern Louisiana, forced the shutdown of a significant portion of offshore platforms, heightening concerns over near-term supply shortages. However, broader worries about a slowdown in global demand, particularly from China, tempered the gains.
Brent crude futures for November delivery climbed 1.3% to $71.55 a barrel, while U.S. crude futures for October saw a 1.5% increase, reaching $68.31. This follows a 2% rise in both benchmarks on Wednesday, as the hurricane's impact on U.S. oil infrastructure became apparent.
"Hurricane Francine has likely disrupted about 1.5 million barrels of U.S. oil production, which we estimate will reduce September production in the Gulf of Mexico by around 50,000 barrels per day (bpd)," UBS analysts noted. The storm's impact led to the evacuation of 171 production platforms and three rigs, leaving nearly 39% of oil and almost half of natural gas production in the Gulf offline.
The Gulf of Mexico accounts for roughly 15% of U.S. oil production, and any disruption in this region can quickly tighten supplies. "With the storm set to dissipate after landfall, oil market attention began to turn to lower demand," said Priyanka Sachdeva, a senior market analyst at Singapore-based brokerage Phillip Nova.
Despite the short-term boost in prices due to the hurricane, the market remains cautious about the overall demand outlook. On Thursday, the International Energy Agency (IEA) cut its 2024 oil demand growth forecast by 70,000 bpd, citing muted demand from China, the world's largest oil importer. The IEA now expects global oil demand to grow by 900,000 bpd next year, a significant downward revision.
Further adding to the bearish sentiment, U.S. oil stockpiles increased across the board last week, driven by a rise in crude imports and a dip in exports, according to the Energy Information Administration (EIA). This increase in inventories comes at a time when the market is already grappling with concerns over a potential economic slowdown in the U.S. and ongoing weakness in China.
Earlier in the week, the Organization of the Petroleum Exporting Countries (OPEC) also revised its global oil demand forecast downward, marking the second consecutive reduction. OPEC's decision to delay a planned relaxation of supply cuts by two months reflects the cartel's concerns about the weakening demand outlook.
Kelvin Wong, a senior market analyst at OANDA, highlighted the medium-term challenges for oil prices, particularly for West Texas Intermediate (WTI) crude. "The medium-term trend remains bearish for WTI crude, supported by weak demand from China and 'growth scare concerns' in the U.S.," Wong explained.
However, some market analysts believe that the current levels may have already priced in much of the negativity surrounding demand. Ole Hansen, head of commodities strategy at Saxo Bank, pointed out that while the IEA's outlook was not optimistic, the market might be overselling the downside risks. "The market now needs to face the question of whether too much negativity has been priced in at current levels," Hansen said.
As Hurricane Francine continues to weaken, the focus will likely shift back to the broader supply-demand dynamics in the oil market. With Brent crude on track for its first consecutive daily gains since late August, the market remains volatile, influenced by both short-term disruptions like the hurricane and long-term concerns about global economic health.
The Federal Reserve's upcoming decision on interest rates could also play a significant role in shaping market sentiment. Investors are speculating that the Fed might start cutting rates as early as next week, a move that could provide some support to oil prices by alleviating fears of a U.S. economic slowdown.
