Oil tumbles as Hurricane Irma imperils demand

Bloomberg

Sun, Sep 10, 2017 - Page 14

Oil declined the most since July as Hurricane Irma threatened to slash energy demand that had only just begun to recover from the wrath of Hurricane Harvey. Futures slid 3.3 percent in New York.

While Valero Energy Corp and other refiners resumed fuel production in the US after Harvey roared ashore two weeks ago, demand for gasoline and other transportation fuels might falter across much of the southeastern US if Florida and neighboring states take a direct hit from Irma.

Florida burns more gasoline than any other state except California and Texas.

Uncertainty has traders “pulling in their horns ahead of the storm,” Phil Flynn, senior market analyst at Price Futures Group Inc in Chicago, said by telephone. “They are worried about demand destruction.”

The most recent data from the US Energy Information Administration showed last week’s rise in US crude stockpiles was the largest since March.

Meanwhile, deliveries of foreign crude to the US Gulf Coast fell to the lowest in records going back to 1990 as Harvey’s wind and rain shut every major port in the region.

“People are thinking we’ve had the worst of the refinery outages and that’s behind us,” Michael Lynch, president of Strategic Energy & Economic Research Inc in Winchester, Massachusetts, said by telephone. “The refineries will be starting up and absorbing more crude.”

West Texas Intermediate (WTI) for October delivery on Friday declined US$1.61 to settle to US$47.48 per barrel on the New York Mercantile Exchange. Total volume traded was about 26 percent above the 100-day average. Prices were up 0.4 percent for the week.

Brent for November settlement fell US$0.71 to end the session at US$53.78 per barrel on the London-based ICE Futures Europe exchange, up 2 percent for the week.

The global benchmark traded at a premium of $5.72 to November WTI, the largest since 2015.

The market also “seems to be a little technically heavy,” Flynn said. “When you don’t know how exactly the fundamentals are going to play out, the computers are just going to play the charts.”

TANKERS PLAY DODGE

Traders are shifting fuel tankers around the world like chess pieces to stay one step ahead of nature.

One natural disaster is difficult enough to trade around. This week, traders have been hit with not one, but four, as three hurricanes and an earthquake rattled the western hemisphere.

“The traders are trying to follow the money, but the hurricanes are getting in the way,” said Andy Lipow, president of Lipow Oil Associates LLC in Houston. “Traders are reacting to the changing arbitrage and the weather that is forcing them to change plans on what seems like a daily basis.”

It is hard to know where tankers are best placed when gasoline prices are as choppy as the seas beneath them.

Prices spiked in the US after Harvey, drawing gasoline, diesel and jet fuel from all corners of the world.

However, some prospective cargoes from Asia and Europe have been canceled as prices plunged almost as fast as they soared.

Now, supplying fuel to Florida after Irma might be eased after the US waived the Jones Act, allowing foreign vessels to carry fuel between US ports.

“In some cases, the trader may deviate from an intended destination due to a better opportunity elsewhere,” said Conor Stone, a marine transport advisor at McQuilling Services LLC. “You have to assume that for the trader to incur the extra expense, they have identified an arbitrage opportunity offsetting the expense.”

When Harvey shut down Texas refineries and ports late last month, Mexico, the US’ biggest customer, quickly made alternate plans for supply.

In July, 72 percent of Mexico’s gasoline sales came from imports. With the quick route from the US Gulf Coast shut off, the trading arm of Petroleos Mexicanos PMI booked vessels to haul fuels like gasoline and diesel from Europe, the Caribbean, Asia, Canada and the rarest origin of them all: New York.

Typically a fuel importer, New York Harbor was tapped to supply fuel-thirsty Mexico. The tanker Largo Sun loaded and set off for Tuxpan on Mexico’s East Coast.

However, that ship is in a holding pattern, with Tuxpan closed as Hurricane Katia strengthens on its way to the coast.

“Pemex was ahead of the game,” said Sandy Fielden, director of research and commodities for Morningstar Inc. “They’ve got a bunch of cargoes on hand.”

However, now, with the hurricane shutting ports, “they’re going to get hit with higher prices,” he said.

Oil market news:

‧ The US oil rig count dropped by three to 756 rigs, the lowest level since June, data from Baker Hughes Inc showed on Friday.

‧ Russia should follow Mexico in using financial instruments to lock in future oil revenue as producers confront growing risks from cyclical price moves, Goldman Sachs Group Inc said.