Oil and gasoline futures settled Tuesday at their highest since early March, as storms forced the shutdown of more than 80% of offshore crude-oil production in the Gulf of Mexico and prompted refinery cuts. Tropical Storm Marco made landfall Monday and was downgraded to a post-tropical cyclone Tuesday morning. Attention is focused on Laura, which was upgraded to a hurricane Tuesday morning and is expected to make landfall on the U.S. Gulf Coast later this week. “Markets know that the hurricane shut-ins are usually transient, and it’s a bit too early to know whether the current ones will have a prolonged bearish effect on prices or not,” said Bjornar Tonhaugen, head of oil markets at Rystad Energy, in a daily note. “Refineries might need to shut-in more runs due to flooding than upstream operators shut in crude supply,” so weaker demand for crude at the refineries may help to offset price-bullish supply constraints.
West Texas Intermediate crude for October delivery rose 73 cents, or 1.7%, to settle at $43.35 a barrel on the New York Mercantile Exchange. October Brent crude, the global benchmark, also gained 73 cents, or 1.6%, to $45.86 a barrel on ICE Futures Europe. Front-month prices for both benchmarks settled at their highest since March 5, according to Dow Jones Market Data.
The Interior Department’s Bureau of Safety and Environmental Enforcement, citing operator reports, estimated Tuesday that 84.3% of offshore oil production in the Gulf of Mexico, or about 1.6 million barrels of oil a day, had been shut in, along with nearly 61% of natural-gas production.
A number of refineries on the Gulf Coast, where almost half of the U.S. oil processing industry is located, have also suspended production ahead of Laura’s expected landfall, noted Eugen Weinberg, analyst at Commerzbank. While the refineries were reinforced following Hurricane Katrina in 2005, there is still the risk of flooding, which could prompt extended closures. Storms can also affect the transportation of crude oil and exports. It’s no surprise then that gasoline futures jumped 6.5% Monday in response to the storms, Weinberg said. A widening premium for October gasoline relative to November indicates market participants fear the potential of shortages, analysts said.
On Tuesday, front-month September gasoline added 2.1% to $1.3959 a gallon—the highest finish since March 5. The most-active October contract gained 0.7% to $1.2685 a gallon. September heating oil meanwhile, rose 1% to $1.2601 a gallon.