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Oil Price Fundamental Daily Forecast – Short-Covering Rally Could End as Hurricane Shifts Away from Oil Fields

James Hyerczyk

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are trading sharply higher for a second day on Wednesday, gaining more than 2%, as a hurricane closed U.S. offshore oil and gas production and an industry report showed U.S. crude inventories decreased.

More than a quarter of U.S. offshore output was shut on Tuesday due to Hurricane Sally. The American Petroleum Institute (API) late Tuesday said crude inventories fell, rather than increased as analysts expected.

At 09:09 GMT, December WTI crude oil is trading $39.78, up $0.85 or +2.18% and December Brent is at $42.00, up $0.85 or +2.07%.

Despite the early rally, the fundamentals remain overwhelmingly bearish so the current short-covering rally could come to an abrupt end at any time after demand worries move back to the forefront.

Hurricane Impact Update

Hurricane Sally is currently crawling offshore along the U.S. Gulf Coast, moving away from oil fields while soaking the region with heavy rains that could damp fuel demand in the U.S. southeast.

While the hurricane has shut some offshore Gulf of Mexico oil and gas production facilities and stirred heavy seas that closed ports from Louisiana to Florida, it has moved at a snail’s pace toward a Wednesday landfall on the coast between Mississippi and Florida, missing most major oil and gas production areas.

Meanwhile, Sally’s intensity has lessened, and is now a Category 1 hurricane, the lowest level on the scale, with 85 miles per hour winds. Oil and chemical ports along the Mississippi River were moving to reopen with restrictions and some offshore operators were preparing to return workers to offshore platforms on Thursday.

American Petroleum Institute Weekly Inventories Report

The API reported late Tuesday a draw in crude oil inventories of 9.517 million barrels for the week-ending September 11. Analysts had predicted an inventory draw of 1.271-million barrels.

The API also reported a build in gasoline inventories of 3.762 million barrels of gasoline for the week ending September 11. Analysts had expected a much smaller 160,000-barrel draw for the week.

Distillate inventories were down by 1.123 million barrels for the week, compared to last week’s 2.293 million-barrel build, While Cushing inventory fell by 798,000 barrels.

Daily Forecast

The API numbers and hurricane scare provided a bullish shot in the arm to a market facing a grim outlook due to bearish fundamentals. Unfortunately, the rally was fueled by short-covering, which likely means those who missed last week’s sell-off will have another opportunity to enter fresh short positions at more favorable price levels.

On Tuesday, oil producers and traders painted a bleak picture for a recovery in global fuel demand as the COVID-19 pandemic rages on, hammering economies.

The International Energy Agency also reduced its forecast for oil demand this year on Tuesday, because of a cautious outlook for the economic recovery from the pandemic. That came after OPEC said it expect world oil demand to fall more sharply than earlier forecast.

Finally, imports in August in Japan, the world’s fourth-biggest importer of crude, fell by more than a quarter from a year earlier, official data showed on Wednesday.

In other news, the U.S. Energy Information Administration (EIA) will release its official inventories data at 14:30 GMT. Traders will be looking to see if it confirms the API data.

Start watching for topping action after the EIA data is released.

For a look at all of today’s economic events, check out our economic calendar.

This article was originally posted on FX Empire