Futures Movers: Oil rallies as hurricane threatens fuel supply flow and EIA cuts crude output forecast

Futures Movers: Oil rallies as hurricane threatens fuel supply flow and EIA cuts crude output forecast

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Markets/commodities reporter

Deputy markets editor

Crude-oil futures rallied Tuesday, finding support as a major hurricane approaching the U.S. East Coast boosted demand for fuel and threatened the flow of gasoline through a key pipeline.

The U.S. government also cut its forecasts for domestic production and concerns continued to grow over the potential for tighter global supplies ahead of renewed sanctions on Iran.

October futures on West Texas Intermediate crude CLV8, +2.74% the U.S. benchmark, rose $1.71, or 2.5%, to $69.25 a barrel. The settlement was the highest in a week. November Brent crude LCOX8, +2.31%  added $1.69, or 2.2%, to $79.06 a barrel on ICE Futures Europe, which was the highest finish for a front-month contract since June 29, according to Dow Jones Market Data Group.

Traders continued to keep a close eye on Hurricane Florence as it approaches the U.S. East Coast. Authorities ordered widespread evacuations along the coasts of the Carolinas and Virginia. “Florence is expected to be an extremely dangerous major hurricane through landfall,” the National Hurricane Center said in a Tuesday afternoon update. Tropical storm-force winds could begin to hit the Carolinas by early Thursday.

Concerns that Florence could weaken energy demand as the East Coast eventually recovers from the storm, contributed to a weaker tone for the U.S. benchmark on Monday, analysts said.

“The oil market prices rallied initially in the path of the storm, only to sell off later on fears of potential demand destruction,” said Phil Flynn, senior market analyst at Price Futures Group. “While millions are in the path of the storm, they are being advised to fill up their gas tanks and to get away,” prompting an uptick in fuel demand.

“Most of the refineries in North Carolina are more inland, but there are worries that flooding and power outages could shut down the Colonial Pipeline, the main line to move gasoline and diesel from the Houston, Port Arthur and Lake Charles refineries northeast, running through states in the Southeast to its endpoint in Linden, N.J.,” he said.

The National Hurricane Center also warned Tuesday that a tropical depression is likely to form in the central or western Gulf of Mexico by late Thursday. The region accounts for 17% of total U.S. crude production.

Among the oil products, October gasoline RBV8, +2.83%  rose 2.8% to $2.014 a gallon, while October heating oil HOV8, +1.65%  added 1.5% at $2.252 a gallon.

October natural gas NGV18, +0.82%  climbed 0.9% to $2.828 per million British thermal units.

Still, some analysts expect the impact on energy from the hurricane to be modest and temporary.

The hurricane “may not have much impact on energy as it is far away from the big offshore Gulf of Mexico producing areas,” Colin Cieszynski, chief market strategist at SIA Wealth Management, told MarketWatch Tuesday. “As we saw with Tropical Storm Gordon, as it is, the impact of storms on WTI has become smaller over the years and any impact tends to blow over quickly.”

Meanwhile, “sanctions kicking in on Iran, reducing their export supply may be having some impact but this has been expected for months and should have been priced in already,” said Cieszynski. The sanctions come into effect in November, but some countries have reportedly been cutting back on their imports of Iranian oil ahead of that.

In a monthly report issued Tuesday, the Energy Information Administration said that Iranian crude production was down 200,000 barrels a day in August compared with July. The government agency also raised average price forecasts for WTI and Brent, and lowered its U.S. crude output expectations, for 2018 and 2019.

“Slowing U.S. supply in a strong demand environment would provide a serious reason for the U.S. oil inventory drawdowns of recent weeks that the street has been ignoring,” said Cieszynski.

Weekly U.S. petroleum-storage data are due late Tuesday from the American Petroleum Institute followed by official weekly EIA data on Wednesday.

Analysts, on average, expect the EIA to report a fall of 2.7 million barrels in crude stockpiles for the week ended Sept. 7, according to an S&P Global Platts survey. They also expect gasoline supplies to be unchanged and distillate stocks to climb by 2.3 million barrels for last week.

Monthly oil reports will come from the Organization of the Petroleum Exporting Countries Wednesday and International Energy Agency Thursday.

Overall, physical demand for oil “remains robust,” said Eugen Weinberg, analyst at Commerzbank, in a Tuesday note, pointing out that recent data showed China’s August crude imports were up 12.9% year over year.

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