Hurricane Michael could cause a 1 million bpd drop in demand, say experts. File Image / Pixabay
The roller coaster that is the crude market saw prices on Wednesday take a nose dive, but for once the main contributing factor was said not to be fundamentals per se, but Wall Street.
The S&P500 stock index marking its biggest one-day fall since February (due to rising U.S. Treasury yields and trade policy concerns) played a major roll in Brent crude falling $1.91, or 2.3 percent, to settle at $83.09 per barrel.
West Texas Intermediate crude fell equally hard, by $1.79, settling at $73.17 per barrel.
Michael Hiley, LPS Partners
The biggest factor now is what Hurricane Michael is doing to demand
Brian LaRose, a technical analyst at United-ICAP, remarked, "As long as we continue to see broad-based weakness in the equity sector, that's going to start spilling over into other areas as well; one in particular will be energy because it's all about economic expectations."
The situation was exacerbated by the International Monetary Fund cutting its global economic growth forecasts for 2018 and 2019, thus raising concerns that demand for oil may also slump.
Another factor influencing Wednesday's crude trading was the American Petroleum Institute reporting that crude inventories rose by 9.7 million barrels in the week to October 5 to 410.7 million, more than four times the 2.6 million barrel build analysts had expected - which further suggests that the concern over the ability of major crude producing nations to boost output quickly and compensate for Iran export losses under the U.S. sanctions may be overblown.
Noticeably absent in the motivation for Wednesday's dismal market performance was Hurricane Michael, which, although causing havoc in the Florida panhandle, spared most offshore oil platforms.
However, the monster storm may influence trading in the days to come: Michael Hiley, head of over-the-counter energy trading at LPS Partners, explained, "The biggest factor now is what Hurricane Michael is doing to demand."
Mizuho Securities estimated that fuel demand in the U.S. southeastern markets may drop by 1 million barrels per day.
Even though the massive inventory build and localized drop in demand are temporary, they demonstrate yet again just how quickly and unpredictably the crude market can shift - which is something to consider when assessing warnings from the likes of Fatih Birol, executive director of the International Energy Agency, who earlier this week said "If there are no major moves from the key producers [to increase output], the fourth quarter of this year is very, very challenging; demand is still very strong and we've been losing oil from Venezuela in big amounts, and also Iran is going down."