Itâ€™s no surprise supplies of crude oil jumped while gasoline inventories fell sharply in the three weeks since Hurricane Harvey hit the Texas Gulf Coastâ€™s refining hub. But traders may be surprised by how quick oil prices have rebounded.
West Texas Intermediate oil futures took an immediate hit from Harvey, which made landfall on the Texas Coast on Aug. 25, â€œas refiners probably didnâ€™t run about 60 million barrels of crude that otherwise would have been processed,â€ said Tom Kloza, global head of energy analysis at the Oil Price Information Service.
As much as a quarter of U.S. refining activity was shut down because of the hurricane, mostly due to damage caused by extreme flooding. As a result, supplies of gasoline and other petroleum products were drawn down sharply, while demand for crude oil was curtailed, prompting a back up of oil inventories.
In Harveyâ€™s wake, the Energy Information Administration reported a two-week jump in U.S. crude-oil supplies totaling more than 10 million barrels, with more than half of that reported for the week ended Sept. 8.
But this week, prices for U.S. benchmark West Texas Intermediate crudeCLV7, -0.12% Â traded as high as $50.50 a barrel on an intraday basis, the highest since May. Brent crude, the global benchmark, LCOX7, +0.02% Â nearly touched $56 intradayâ€”a level it hasnâ€™t seen since April.
WTI, in particular, showed a relatively quick turnaround from a dip below $46 in late August.
â€œWeâ€™ll almost certainly see the spread between WTI and Brent narrow and weâ€™ll see U.S. companies smash the record for crude exports sometime in the next 40 days,â€ said Kloza.
Refineries have also seen a gradual recovery, with about 9% of U.S. refining still down or not restarted, according to data from OPIS parent company IHS Markit as of late Tuesday. Meanwhile, operators in the interior states, away from the coasts where some operators are struggling after the floods, are â€œrunning full out,â€ said Kloza. He also pointed out that a number of refiners have deferred maintenance until 2018.
Adding further to the potential for tighter crude-oil supplies and higher prices, data from the Baker Hughes BHGE, +1.43% Â Friday showed that the number of active U.S. oil rigs fell for a second week in a row.
But WTI oil prices have managed to climb even before any actual pullback in crude inventories as a report from the International Energy Agency on Wednesdayshowed that compliance with the Organization of the Petroleum Exporting Countries-led production-cut agreement improved in August. The Paris-based agency also raised its oil demand outlook for this year.
Meanwhile, news reports said that OPEC heavyweight Saudi Arabia is floating the idea of extending the output-cut pact past March of next year.
â€œThe recent rally for oil prices â€œis a welcome respite, but most remain cautiously optimistic and, in fact, any indications that OPEC may consider not extending cuts would undoubtedly shatter any price appreciations,â€ said Rich Pontillo, senior director as Nasdaq Advisory Services.
A committee monitoring compliance with the production-cut agreement is set to meet on Friday.
â€œIt remains unclear if members will announce any substantial updates or if they will wait until [the OPEC] meeting in November,â€ said Pontillo.
For now, however, WTI prices havenâ€™t been able to settle at or above the key $50 mark, and it might not move much more than $10 in either direction from Fridayâ€™s settlement of $49.89.
â€œWe see little reason to expect prices to trade below $40 or above $60 for any protracted period,â€ said Katrina Lamb, head of investment strategy and research at wealth management firm MV Financial.
â€œThe major story line in world oil marketsâ€ continues to be shale, she said.
â€œU.S. producers will continue to produce, cost efficiencies will continue to make their cost thresholds more competitive,â€ said Lamb. â€œThere will be very little room for effective policy management at OPEC, regardless of whether they try to extend out the production cuts or throw in the towel and try again to sacrifice profits in the name of market share.â€