Houston Woes Could Cause Crude to Test $40/bbl, Says Analyst

Wednesday August 30, 2017

Along with causing further misery for Houston residents, Hurricane Harvey on Tuesday caused another jump in gasoline prices - to the tune of 4 percent - while West Texas Intermediate dropped 13 cents to $46.44 per barrel.

Brent, meanwhile, rose 11 cents to $52.00 per barrel, with Tuesday's performance said to have also been influenced by production disruptions in Libya and Columbia.

Stephen Schork, president of The Schork Group, explained the market dynamics simply: "hurricanes tend to be very bearish for the stuff you put into the refinery - crude oil - and very bullish for the stuff you take out of it," and he added that unlike past years, a lot of pipes now come to Houston from Canada and other markets, and with the refineries and ports closed "we're now in the process of building a very large glut in crude oil prices, hence why we're seeing a bearish reaction in the crude oil market."

Schork predicted that with the holiday driving season over and heading into the fall maintenance season for refineries, "we could see a tremendous amount of demand destruction already on top of what we're experiencing," with prices perhaps dropping to the mid $40s - but not a dip below the $30s, he said.

The damage caused to refineries by Hurricane Harvey will also negatively impact the Organization of the Petroleum Exporting Countries' (OPEC) bid to rebalance the market, says Barclays, whose analysts pointed out, "Disruptions to refineries, production and trade will make the weekly Energy Information Administration (EIA) data even noisier and less useful as a high frequency indicator at the very time OPEC needs it most."

Schork's reasoned forecast notwithstanding, James Cordier, founder and president of Optionsellers.com, thinks prices are set to drop precipitously in the near-term: earlier this week he worried that as we move further into the lower demand seasons, crude will drop to $32 per barrel by December.