Hurricane Sandy may inflict a negative hit to demand for crude oil and fuel products as production at U.S. East Coast refineries comes to a standstill, reducing demand for the primary input.
Meanwhile, diesel and gasoline consumption by businesses and households could also be cut sharply after New York and other large cities are shut down by the storm, reducing economic activity. Power outages lasting as long as ten days may reduce demand further.
The supply of gasoline, diesel and jet fuel into the U.S. East Coast ground almost to a halt on Monday as Hurricane Sandy forced the closure of two-thirds of the region's refineries, its biggest pipeline, and most major ports, Reuters reported.
(Read More: What Will Sandy Mean for Gasoline and Heating Oil?)
"If you think of it from the end-users' standpoint, if they can't process it then they're going say, 'I'm going to store it and use it later,'" CME floor trader Tres Knippa of Kenai Capital Management told CNBC's 'Closing Bell' on Monday. "So if you don't have the end-users using it, that means there's more supply and, ergo, crude going down. However, as we move into the election I am not interested being short crude at these levels."
Brent December crude (Intercontinental Exchange Europe: LCOCV1) dipped 11 cents to settle at $109.44 a barrel, having reached $110.26. Brent was on pace to post a more than 2 percent loss for the month, a second straight monthly loss.
U.S. December crude (New York Mercantile Exchange: CLCV1) fell 74 cents to settle at $85.54 a barrel. Monday's $84.66 intraday low was the lowest price since July. U.S. crude futures were on track to end October down more than 7 percent, after sliding more than 4 percent in September.
Still, at this juncture traders appear divided over the direction crude and product markets will take in the wake of the worst weather event to hit New York City since at least 1938.
Fuel product futures initially jumped reflecting fears that power outages and flooding could leave refiners struggling to restore operations while reports of pipeline, port and terminal operations either shuttered or reduced raised concerns of supply bottlenecks.
(Read More: Sandy Also Could Wreak Havoc With Oil Refineries)
Colonial Pipeline said on Monday it is proceeding with its plans to shut Line 3, which runs from North Carolina to New Jersey, at 7 p.m. Monday night ahead of the arrival of Hurricane Sandy.
November gasoline futures (New York Mercantile Exchange: rbcv1), which expire on Wednesday, rose 5.77 cents to settle at $2.7568 a gallon on the New York Mercantile Exchange on Monday. The $2.8115 session high was the highest price since Oct. 17. U.S. November heating oil gained 1.74 cents to settle at $3.1152 a gallon, reaching its highest level relative to U.S. crude oil on record.
"With all these big closures of all these refiners on the East Coast, it's not a surprise that you're going to see crude a little bit lower and unleaded gasoline higher," Kenai Capital's Knippa said.
But longer-dated gasoline prices dipped on Monday as traders start pricing in reduced demand for fuel after the almost total shut-down of eastern seaboard roads and airports, Reuters reported.
"While the storm will shut down 6.5% of U.S. refining capacity and motorists will top off their tank the shutdown of major cities and the expected power outages may take a toll on demand unlike anything we have seen before," said Phil Flynn, Senior Market Analyst at The PRICE Futures Group.
"The impact on demand may not last for hours but more than likely for days. This could be the biggest demand destruction event in history. The East Coast is by far the largest consumer of gasoline as they consumed 3,202 barrels per-day," Flynn added.
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