Crude oil caught between demand woes and production disruption

Crude oil prices witnessed a second consecutive weekly decline on September 11 as demand woes returned in full force amid a rising number of new COVID-19 cases across the globe. Adding to these concerns has been the recent data showing higher than expected increase in the US crude oil inventories.

Against this backdrop, crude oil prices started the week on a soft footing –but will an impending storm help support the markets?

First back-to-back weekly drop since April rout

Oil futures ended last week with a loss of more than 6%, marking the first back-to-back weekly slide since the price collapse in April. Both global benchmarks, namely Brent and West Texas Intermediate (WTI), were pressured by concerns about a stalled economic recovery amid a global rise in infection rates.

US stockpiles grow more than expected

Another major factor has been a report released by the Energy Information Administration (EIA) on September 10. The report showed an increase of 2 million barrels in commercial crude oil inventories, snapping a six-week streak of inventory drawdown. The weekly build-up was largely a result of refiners cutting back on processing in the Gulf of Mexico amid Hurricane Laura.

According to investors, the weekly rise in inventories added supply glut concerns to the growing list of bearish factors weighing on oil prices.

Libyan oil supply looks set to increase

Worries over supply grew after the announcement made by the US Embassy in Tripoli on September 12. According to the press release, Libyan National Army (LNA) commander Haftar promised the full reopening of the energy sector no later than September 12. Libya, which has the largest crude reserves in Africa, has been under an oil blockade for eight months.

Tropical Storm Sally threatens Gulf Coast production

However, an impending tropical storm has threatened to disrupt oil production for the second time in less than a month. The US National Hurricane Center warned on September 12 that Tropical Storm Sally was turning towards the US Gulf Coast. The center forecast hurricane conditions and flash flooding in the region.

Impact of Hurricane Laura limited by demand woes

The US Gulf Coast has already been suffering extended power outages and refinery shutdowns in the aftermath of Hurricane Laura –the strongest on record to make landfall in the state of Louisiana.

Although oil prices found some temporary support from Hurricane Laura, the rise in oil prices slowed down due to concerns about weaker demand growth. Concerns regarding a stall in economic activity were largely a result of continuing increases of COVID-19 cases worldwide.

OPEC forecasts lower demand ahead of Thursday meeting

These concerns were visible in OPEC’s monthly report released on September 14. According to the report, the world oil demand growth forecast for 2020 was revised down by 400,000 b/d, as compared to the August report, to a decline of 9.5 million b/d.

The report came ahead of OPEC’s Joint Ministerial Monitoring Committee meeting scheduled. The OPEC members and their allies are expected to meet on September 17 to discuss the state of the market and compliance with production cuts.