Last year, hurricane season disrupted a lot of oil production and refining capacity along the U.S. Gulf Coast, sending oil prices soaring. This year, however, oil bulls may be in for a disappointment as forecasts are for a quieter hurricane season.
Colorado State University recently revised its forecast for the number of named storms this season to 11 from 14, Bloomberg reports, and meteorologists from AccuWeather predicted the formation of an El Nino in August, which will reduce the likelihood of tropical storm formation. AccuWeather expects between 10 and 12 named storms this season, and between 2 and 4 major hurricanes. Colorado State University expects just one storm to develop into a major hurricane.
With 20 percent of U.S. crude production capacity and 45 percent of refining capacity in the Gulf of Mexico, it is easy to see why storm forecasts are important for oil traders—bulls and bears alike. Last year the bulls had reason to celebrate (although they probably didn’t do so openly) as storm losses hit US$200 billion, the highest storm bill in history.
That said, there is always room for a surprise with weather. As the lead author of Colorado State University’s latest forecast, Phil Klotzbach told Bloomberg, “it only takes one hurricane to hit where you are to make it an active season.”
There are also plenty of other reasons for oil bulls to expect a good run in the coming months. The two biggest among these reasons are Libya and Iran. While Iran has been occupying headlines since May when President Trump announced that the United States would pull out of the Joint Comprehensive Plan of Action, recently it has been Libya grabbing the headlines.
Last week, the eastern-affiliated Libyan National Army passed control of the Oil Crescent to the eastern NOC, which prompted the western—and UN-recognized—NOC to declare force majeure on almost all production.
Meanwhile, production in Venezuela continues to fall and analysts have doubts that Saudi Arabia and other OPEC members will be able to bring back enough production quickly enough to compensate for the shortfalls.
Related: Saudi King To Trump: We Will Boost Oil Output If Needed
As a result of these developments, Brent and WTI have been climbing higher, with the international benchmark earlier this week passing US$78 a barrel. This is the opposite of what OPEC and Russia had in mind when they agreed last month to start pumping more crude. And it is also the opposite of what President Trump wants: he has repeatedly berated OPEC for keeping prices “artificially” high.
However, in an interesting twist of events, the U.S. sanctions against Iran, and especially the State Department’s insistence that every importer of Iranian crude cuts imports to zero, are now the biggest driver behind higher oil prices. Also, some analysts have warned that Trump’s Twitter activity has had the opposite of the desired effect on oil prices.
However hurricane season turns out, prices at the pump are likely to remain higher for the next few months. What the upward potential is remains uncertain. Earlier this week the Russian and Saudi energy ministers reaffirmed their commitment to bring back 1 million bpd online—a figure Saudi Arabia’s Al-Falih had called “nominal” at the June meeting—but chances are that the biggest oil buyers want to actually see these barrels rather than hear affirmations. Until they do, prices will remain elevated with or without hurricanes.
By Irina Slav for Oilprice.com
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