Oil has declined 7.4 per cent this month as investors weigh signs of rising global output against production cuts by some members of the Organization of Petroleum Exporting Countries.
Crude oil prices rose slightly Thursday, contrary to the expectations of the Organisation of Petroleum Exporting Countries (OPEC), as oil traders focused more on Hurricane Harvey's hit on oil demand than the impact on supply disruptions.
Before the storm, USA inventories were running at maximum capacity to meet record gasoline demand of 9.846 million barrels a day "narrowly above the previous all-time high set just four weeks ago", said Paul Horsnell, the head of commodity research at Standard Chartered. The loss of refineries around Port Arthur, Texas, would leave only Louisiana refineries supplying fuel to NY and other demand centers.
Crude oil futures continued to drop Wednesday morning amid fears that refinery operations along the Texas-Louisiana coast will be interrupted for some time.
With that, gasoline futures headed higher for a third straight day. Gasoline was up 21.03 cents, or 11.2 percent, at $2.0950 at 1:53 p.m. (1753 GMT).
"In terms of product price increases, it might get worse before it gets better", said Rob Smith, an energy analyst with IHS Markit.
"The key issue is that because the refineries are offline, it does not mean they are damaged".
In contrast with previous major hurricanes such as Katrina in 2005, Harvey has actually seen oil prices edge down, as traders focused more on the hit to demand from damaged US refineries than the blow to supply from knocked-out production. In the previous week, the crude oil inventories were down 3.3 million barrels and Gasoline inventories were down 1.2 million barrels.
Tankers have been booked to transport gasoline from Europe to the U.S., and the fuel is now set to be shipped over even longer distances as the premium of American prices soar relative to those in Asia. "It has to come from Asia even".
Due to September contracts expiring today, trading in other future contracts, namely October experienced higher volumes, although with lower volatility, suggesting traders think the spike will be short-lived.
USA gasoline futures RBc1 have rallied roughly 26 percent from the previous week to a two-year high above $2 a gallon, buoyed by fears of a fuel shortage days ahead of the Labor Day weekend that typically brings a surge in driving. Other refineries in the area are likely to do the same later this week.
Goldman Sachs analysts wrote Wednesday they expected about a tenth of what is now offline to stay shut for several months.
Torrential rain and catastrophic flooding followed the hurricane that slammed into Texas over the weekend, forcing refiners to shutter operations as a precaution. Those gasoline inventories can now be drawn down to make up for the 10 refineries that have been shuttered by Harvey.
The Colonial Pipeline Company late Wednesday also said it was suspending service to the main pipeline that carries fuel from Texas to the East Coast. Another pipeline that carries crude from the big Permian Basin field in Texas to Houston-area refineries is also closed.