Oil prices are on track to register their first weekly gain in a month, driven by a combination of supply disruptions in the U.S. Gulf of Mexico due to Hurricane Francine and a broader market recovery that has lifted commodities. The Brent crude benchmark rose above $72 per barrel on Friday, continuing a three-day rally that has reversed recent declines. U.S. West Texas Intermediate (WTI) crude also saw significant gains, trading at nearly $70 per barrel.
The recovery in oil prices follows a period of steep declines, during which Brent briefly dipped below $70 per barrel, a level not seen since late 2021. However, as the impact of Hurricane Francine forced the evacuation of production platforms and disrupted nearly 42% of oil output in the Gulf of Mexico, prices began to rebound. Analysts at UBS noted that "ongoing supply disruptions in Libya and larger than expected disruption in the Gulf of Mexico due to Hurricane Francine keep the oil market tight."
This week's price rally has been further supported by a weaker U.S. dollar, which fell to a one-week low on Friday, making dollar-denominated commodities like oil cheaper for holders of other currencies. This decline in the dollar, coupled with a risk-on tone in broader markets, has encouraged investors to cover short positions, contributing to the upward momentum in oil prices.
Oil producers in the Gulf of Mexico have been assessing damage and conducting safety checks as they prepare to resume operations. The storm, which has now weakened from its earlier hurricane strength, spurred a sizable shut-in of production, with UBS analysts forecasting a 50,000 barrel per day (bpd) drop in output for September, while FGE analysts estimate a more significant decrease of 60,000 bpd to 1.69 million bpd.
Despite the current rally, the oil market remains under pressure from broader economic concerns, particularly in China, the world's largest oil importer. Both the Organization of Petroleum Exporting Countries (OPEC) and the International Energy Agency (IEA) lowered their demand growth forecasts this week, citing economic struggles in China. The IEA highlighted that global consumption growth in the first half of the year was the lowest since the pandemic, reflecting the cooling of China's economy.
In the United States, the Energy Information Administration (EIA) reported an increase in oil stockpiles last week, driven by higher crude imports and a dip in exports. This rise in inventories, combined with concerns about global demand, continues to weigh on the market's outlook.
However, the recent disruptions and market recovery suggest that oil prices could still see further upside. Macquarie analysts noted that "the market is not without upside potential, given recent strife in Libya and a series of geopolitical distortions in recent years." They added that non-OPEC supply growth and sluggish demand could limit the need for OPEC+ to return barrels to the market as previously planned.
Looking ahead, investors are closely watching the U.S. Federal Reserve's policy meeting scheduled for next week. The Fed is widely expected to cut interest rates in response to signs of a labor market slowdown, with speculation that policymakers may opt for a significant 50-basis-point reduction. Lower borrowing costs could support economic growth and, by extension, energy demand, providing further support for oil prices.
As the week comes to a close, Brent crude is set to record a weekly gain of around 2.2%, while WTI is poised for a 3.1% increase. These gains mark a significant turnaround after a period of sustained declines, reflecting the complex interplay of supply disruptions, market sentiment, and broader economic factors that continue to shape the global oil market.
