LONDON – Oil prices advanced Friday, recouping some of Thursday's losses that had been driven by concern that a hurricane moving toward the U.S. gulf coast could lead to excess inventories.
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Brent crude, the global benchmark, was up 0.77%, at 52.06 a barrel, on London's Intercontinental Exchange. On the New York Mercantile Exchange, West Texas Intermediate futures were trading up 0.70%, at $47.76 a barrel.
"This is a reaction to the overreaction yesterday," Steve Sawyer, an analyst at consultancy Facts Global Energy, said of the market shift Friday morning.
U.S. crude closed down roughly 2% Thursday on fears that rain and flooding could disrupt refinery operations in parts of Texas, halting crude intake.
"The market is probably going to regain a chunk of that day," Mr. Sawyer predicted.
The U.S. National Weather Service upgraded Tropical Storm Harvey to a hurricane on Thursday, prompting some refiners to shut down operations. Harvey is expected to reach the Texas coastline by Friday evening or Saturday.
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Tamas Varga, an analyst with oil brokerage PVM Associates Ltd., suggested in a note Friday that both crude and gas prices could rise further as the hurricane nears the shore and upstream crude production is potentially also put at risk. Generally, he explained, "a threat to any refining and producing region is bullish for both crude oil and products."
Among refined products, Nymex reformulated gasoline blendstock--the benchmark gasoline contract--was up more than 2%, at $1.5798 a gallon. ICE gasoil changed hands at $486.75 a metric ton, up 0.88% from the previous settlement.
Harvey is the first hurricane to hit the Gulf since the U.S. shale boom got under way over the past decade. Hurricane Ike was the last to hit the region, in 2008, as oil prices were reeling from the global financial crisis. However, in 2005, during Hurricane Rita and Hurricane Katrina, crude prices rose between 4% and 6%.
Meanwhile, crude prices were somewhat bolstered by bullish news this week, as official U.S. data showed a further decline in crude inventories and the Organization of the Petroleum Exporting Countries indicated it could further extend its deal to cut output.
The Energy Information Administration reported crude stocks dropped by 3.3 million barrels during the week ended Aug. 18, while gasoline stockpiles fell by an unexpected 1.2 million barrels.
OPEC said Thursday that "all options, including possible extension" of the production cut agreement are on the table when the cartel meets in Vienna in November.
OPEC and 10 producers outside the cartel, including Russia, first agreed late last year to cap production at around 1.8 million barrels a day lower than peak Oct. 16 levels, with the aim of reining in the global oil glut and sending prices higher. The deal was extended in May through March 2018.
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Oil prices advanced Friday as investors tried to gauge the impact of a hurricane hurtling toward the Texas coast.
U.S. crude futures rose 44 cents, or 0.93%, to $47.87 a barrel on the New York Mercantile Exchange. Brent, the global benchmark rose 37 cents, or 0.71%, to $52.41 a barrel on ICE Futures Europe.
Still, both benchmarks ended the week lower. The U.S. benchmark posted its biggest weekly loss since July 7, in a sign of how much the energy landscape has changed since the last time a major storm hit the Gulf Coast.
Harvey is the first major hurricane to hit Texas since 2008, and the market is reacting differently than it has to other storms. In previous years, the interruption to offshore oil production in the Gulf has caused prices to spike dramatically. Now, as more oil production has shifted onshore to shale formations, the greatest impact may be to fuel making and exports.
"Until now hurricanes have not directly threatened the infrastructure and production associated with the U.S. shale-inspired export boom," Barclays analysts wrote in a research note Friday. "We think that the flooding impact of Hurricane Harvey could make it more destructive to U.S. crude and product supplies as well as port facilities than the market is currently assuming."
Oil prices initially fell as the threat of the storm became clear Thursday, dropping about 2% amid concerns that refiners in the storm's path would halt operations and stop churning as much crude into fuel.
On Friday, Harvey strengthened to a Category 3 storm. It is expected to reach the Texas coastline Friday evening or early Saturday.
Refineries in the Corpus Christi area have started to shut down in anticipation of the storm. Companies including Valero Energy Corp., Flint Hills Resources and Citgo Petroleum Corp. have said they're shutting down plants, taking offline some 840,000 barrels-a-day of refining capacity.
Fuel prices largely held on to Thursday's gains. Gasoline futures rose 0.25 cent, or 0.15% to $1.6666 gallon. Diesel futures edged up 0.13 cent, or 0.08%, to $1.6223 a gallon.
Analysts said the effect on fuel markets could become more pronounced if the storm inundates the Houston area, where there is an even larger concentration of refineries.
"You're not worried so much about crude production. The refineries are the big concern right now," said Michael Hiley, a trader at LPS Futures LLC. "You're worried about wind damage, flood damage, power outages and the workforce being able to get to the refineries."
The storm is expected to disrupt oil output, with companies like Exxon Mobil Corp. evacuating workers from platforms in the storm's path. The Bureau of Safety and Environmental Enforcement said Friday afternoon that 21.55% of Gulf of Mexico production had been shut in. Some companies operating in the Eagle Ford shale formation in south Texas also took steps to shut in wells and evacuate workers.
The gains in oil prices Friday were in part a reaction to Thursday's larger swings. Donald Morton, a senior vice president at Herbert J. Sims & Co. who runs an energy trading desk, said the difference between fuel and oil prices, known as the "crack spread," had gotten so wide that traders were beginning to reverse their bets, selling products like gasoline and diesel and buying crude.
"Crude oil was going to be dragged along eventually, the crack spreads can't continue to run the farm," he said.
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(END) Dow Jones Newswires
August 25, 2017 16:25 ET (20:25 GMT)