U.S. West Texas Intermediate and international-benchmark Brent crude oil futures settled higher last week with the threat of a hurricane providing most of the strength. This was followed by a mild threat to distribution in the Middle East and fourth consecutive weekly decline in U.S. stockpiles. Helping to cap the gains were two reports that warned about lower future demand.
Oil Rigs Evacuated in Gulf of Mexico
Hurricane Barry made landfall over the weekend. Although the storm has weakened, it causing a massive amount of flooding in Louisiana. While developing as a tropical storm in the Gulf of Mexico throughout the week, oil companies cut more than 1 million barrel per day (bpd) of output, or 53% of the region’s production.
Iran Agitates Britain
Three Iranian vessels tried to block the passage of a British ship run by BP through the Strait of Hormuz, the British government said. They withdrew after warnings from a British warship. Although prices rose in response to the news, apparently the event was anticipated after Iran warned Britain would face “consequences” over the seizure of an Iranian oil tanker.
U.S. Government Reports Another Big Draw
On Wednesday, the U.S. Energy Information Administration (EIA) reported crude stocks fell 9.5 million barrels in the week to July 5. Traders were looking for a 3.1 million-barrel draw. Traders said the decline was caused by ramped up refinery output.
Renewed Demand Concerns
Keeping a lid on prices were two independent reports calling for lower demand.
On Thursday, OPEC said the world would need 29.27 million bpd of crude from its members in 2020, down 1.34 million from this year.
Early Friday, the International Energy Agency (IEA) expects the return of an oversupplied oil market next year, despite the OPEC-led pact designed to cut production and stabilize prices.
The IEA said the “main message” of its closely-watched report was that oil supply in the first six months of 2019 had exceeded demand by 0.9 million barrels per day.
“This surplus adds to the huge stock builds seen in the second half of 2018 when oil production surged just as demand started to falter,” the IEA said.
“Clearly, market tightness is not an issue for the time being and any rebalancing seems to have moved further into the future.”
“The widely-anticipated decision by OPEC+ ministers to extend their output agreement to March 2020 provides guidance but it does not change the fundamental outlook of an oversupplied market,” the IEA said.
Rig Count Fell
In other news, the weekly U.S. oil rig count fell for the second straight week. Baker Hughes energy services reported that drillers cut four oil rigs in the week to July 12, reducing the total to 784, the lowest since February 2018.
Bullish traders should be a little nervous early in the week because of uncertainty over flood damage from Hurricane Barry. If the flooding caused little or no damage, which would delay production, then prices could retreat as buyers trim positions placed ahead of the hurricane.
Additionally, although tensions are high in the Middle East, we’re not likely to see any prolonged rally unless there is an actual loss of crude oil. To elaborate further, there has to be an actual supply disruption.
Traders are also going to be on edge ahead of this week’s American Petroleum Institute and U.S. Energy Information Administration weekly inventories reports. Due to the shutdown of rigs in the Gulf of Mexico ahead of the hurricane, there is likely to be less certainty over the numbers. Traders are already looking for a potential gasoline shortage.
This article was originally posted on FX Empire
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