Crude down as Analysts Predict a Worsening Picture for Crude in Coming Days

As waterlogged Houston residents on Monday braced for Round Two from Hurricane Harvey,  analysts worried that the picture for crude demand will worsen in coming days.

Andy Lipow, president of Lipow Oil Associates, pointed out that if the storm stalls over key production areas, that could result in damage to electric pumps in refineries, potentially requiring repairs that could take weeks or months.

As for the widening price differential between gasoline and oil due to declining demand for crude at refineries, Stephen Schork, editor of the Schork Report, opined that "if we go through and we don't see any lasting damage, and these refineries, which have shut in in an orderly manner, come back online quickly, then these cracks, the differential between gasoline prices and crude oil prices, which are sky high right now, will come crashing back down."

Over at CNBC, Suzanne Minter, director of energy solutions for S&P Global Platts, and Helima Croft, global head of commodity strategy for RBC Capital Markets, attempted  a big picture assessment in discussing the impact of Hurricane Harvey on the U.S. oil market: the former said that although "we think there are 2.5 million barrels per day currently offline" due to major refineries shut down in wake of flooding,  "87 percent of U.S. capacity is still on line, and that's a really important thing to focus on."

She added that the current shutdown of exporting due to Harvey acts as "a cushion" to domestic supply, as does the fact that nobody in Houston is able to drive their automobiles.

But Croft called Harvey "a significant headwind for WTI" after a summer of very heavy draws that failed to crack the $50 per barrel price ceiling; "undoubtedly to have this much crude backing up right before maintenance season is not good in any way for WTI."

Michael Cohen, head of oil markets research for Barclays, was equally troubled by Harvey's potential negative influence on the market: he told Bloomberg that the full implications of the production, demand, refined product impacts will not be known for several weeks; however, he said production quotas in other parts of the world could be readjusted depending on the severity of the downturn in U.S. production.

It has not gone unnoticed that the devastation caused by the hurricane has achieved in a few days what the Organization of the Petroleum Exporting Countries (OPEC) has been unable to achieve for the better part of 2017 in terms of tightening supplies and boosting prices.

This is the contention of Clyde Russell, Asia commodities and energy columnist at Reuters, who in a story published on Monday wrote that with U.S. gasoline futures jumping as much as 6.8 percent in early trade on Monday and Brent reaching as high as $52.84 per barrel, "So far this would imply the crude market is fairly relaxed about the impact of Harvey, but it's possible the effect of the storm will travel far beyond U.S. gasoline prices, given the United States' status as an emerging power in crude and refined product exports."

He echoed the comments of other analysts by noting that "The risk is that this onshore production takes longer to return than the market may expect, given the apparent widespread damage to infrastructure from flooding in the region and the length of time it may take floodwaters to recede.

"If this is the case, customers for U.S. crude and product exports may well find themselves scrambling to line up replacement cargoes."

For the time being at least, more eyes are on what Harvey will do next than the immediate health of the market; and as if to bring about a sense of calm to the proceedings, the International Energy Agency said there is no need for now to release fuel from emergency stockpiles, because global oil markets are well supplied.

WTI Monday ended down $1.30 to $46.57/BBL, and Brent closed out the day down $0.52 to $51.89/BBL.

Presumably, even if Round Two of Harvey proves to be more muted than some fear, the damage it has caused may be enough to modify opinions recently expressed by experts such as Mike Wittner, head of oil market research at Societe Generale SA, who earlier this month said that fundamentals are "strong now, but bearish seasonality for crude and products is just around the corner."