Oil braces for OPEC+ meeting & Hurricane Ida fallout

Commodities

Traders look to gauge the impact of Hurricane Ida on US oil and OPEC+’s September meeting this week, while natural gas seeks a supply/demand in the battered southern states.

Oil trading

Hurricane Ida smashed through US on and offshore oil production infrastructure at the weekend, leaving behind a trail of closed or damaged rigs in its wake. Even the crucial Colonial Pipeline, a vital fuel artery, was closed.

All bad news for oil prices? Yes and no. We’ve seen in the past that extensive shuttering of infrastructure can actually be bullish if it leads to a supply squeeze. High demand meeting lower output equals higher prices.

But Ida’s devastation isn’t limited to rigs, refineries, and pipeline shutdowns. We can’t forget the civilian population. Homes have been smashed. One million people in Louisiana are without power. In the current climate, the numbers of people going to work in affected Southern states will have dropped and with it fuel demand.

The picture is still blurry – but oil has managed to keep its gains from across the past week into trading this morning. The key benchmarks are approaching levels similar to those at the end of May when prices really took off.

WTI is currently trading for around $69.20. Brent futures are floating around the $72.25 level.

Oil also got another boost this week when OPEC+ members indicated it reconsider its planned output increases in the wake of new market realities.

Kuwait’s Oil Minister Mohammed Abdulatif al-Fares on Monday said: “The markets are slowing. Since COVID-19 has begun its fourth wave in some areas, we must be careful and reconsider this increase. There may be a halt to the 400,000 (bpd) increase.”

The cartel meets on Wednesday to discuss how best to proceed in a Delta-variant dominated world.

We’ve seen rising cases impact on oil demand throughout Asia and in China, although new reports suggest Chinese imports are picking up pace after a couple of months of slowing output.

OPEC+ has had to really step up its supply/demand balancing act over the last 18 months or so. It had denied President Biden’s request to open the taps wider in the last month, and this talk of halting production raises could help support prices if demand continues to fall.

US crude oil inventories experienced another drawdown in the EIA’s latest report. According to the energy agency, US crude stockpiles decreased by 3.0 million barrels from the previous week.

At 432.6 million barrels, U.S. crude oil inventories are about 6% below the five year average for this time of year.

Natural gas trading

Hurricane Ida’s impact isn’t just limited to oil. The heartland of US LNG production lies in Ida’s destructive path. Some 95% of Gulf of Mexico production has been affected so far.

Onshore infrastructure in its path fared better. Any damage done has not been as serious as previously forecast

Price action still remains relatively robust. Natural gas is trading for around $4.328 at the time of writing, although it has fallen away from the yearly highs seen a couple of weeks ago.

But the real test now is demand. A million Louisiana citizens are without power. Hot temperatures are potentially on their way, but without the ability to air condition their homes, cooling gas demand may sink in these key areas. That could weigh heavily on price action going forward. We’ll know more once a concerted relief effort has been made.

Away from Louisiana, demand could be generated by hot temperatures in California, the Plains and Texas, but it remains to be seen if this will offset demand from hurricane-hit regions.

The US natural gas rig count, however, has dropped – likely shuttered as Ida made its way through the Gulf. According to Baker Hughes, the rig count dell by 5 to 97 last week. That’s the lowest seen in over two months.

Because this was hurricane-induced, however, we may see these rigs come back online soon.

Working gas in storage was 2,851 Bcf as of Friday, August 20, 2021, according to EIA estimates. This represents a net increase of 29 Bcf from the previous week. Stocks were 563 Bcf less than last year at this time and 189 Bcf below the five-year average of 3,040 Bcf.