Hurricane Francine Propels Oil Prices

Crude oil (CL) futures rose 2.1% on Monday 16 September, to $70.09 a barrel due to production disruptions in the U.S. Gulf of Mexico caused by Hurricane Francine. 

WTI prices edged to psychological resistance last Friday 13 September, ending a four-week losing streak due to production disruptions stemming from Francine. 

Concerns about ongoing U.S. oil output disruptions continued to extend into Tuesday's (17 September)  trading despite Chinese data weighing on sentiment. 

However, traders will soon focus on the upcoming FOMC decision due on Wednesday, 18 September. This is a week of "amplified" volatility following a second assassination attempt on former U.S. President Donald Trump and upcoming central bank decisions in the U.K. and Japan. 

Hurricane Francine Main Suspect for Oil Upside

The shutdown of offshore oil rigs in the U.S. Gulf weighed on recent supply concerns after the U.S. Bureau of Safety and Environmental Enforcement reported on Monday that 12.18% of oil production has remained shut. 

Hurricane Francine, a Category 2 hurricane, shut in around 42% of crude oil production last week, equal to 730,000 barrels per day (bpd), bringing total market supply disruptions to 1.5 million bpd. The remaining production disruptions stemmed from the ongoing turmoil in Libya after UN-led talks failed to spark optimism. The oil blockade in Libya has reduced the country's production output to around 300,000 bpd from almost 1 million bpd, leading to an exemption from OPEC+ production targets.

WTI prices rose on Monday despite disappointment surrounding Chinese economic data over the weekend. Retail Sales fell from 2.7% to 2.1%, below expectations of 2.5%, and Industrial Production from 2.1% to 4.5%, below forecasts of 4.8%. Moreover, foreign direct investments (FDI) showed a slump of 31.5% vs. 30% expected and 29.6% prior, adding to recent worries.

Analysts Downgrade Oil Price Targets

Following Industrial Production data from China, Goldman Sachs (GS) and Citigroup (C) decided to downgrade China’s GDP growth below the country’s 5% target to 4.7% and 4.8%, respectively.

"We believe the risk that China will miss the 'around 5%' full-year GDP growth target is on the rise, and thus the urgency for more demand-side easing measures is also increasing," Goldman Sachs said on 15 September.

Several investment banks, including Morgan Stanley (MS), have downgraded the oil price forecast for the last quarter of 2024 and next year. MS reduced its Brent forecast from $85 to $80 per barrel in late August and once again to $75 in early September, citing demand challenges; GS pointed to weaker Chinese demand, high stockpiles and rising U.S. Shale production for its downgrade to $70 to $85 per barrel from  $70 to $85 per barrel prior; and Citi said that Brent could fall as low as $60 per barrel in 2025 if OPEC+ does not proceed to oil production cuts.

In the recent barrage of oil price downgrades, investment bank UBS also lowered the price forecast of Brent (EB) oil prices on 16 September from $80 to $75 per barrel in 2025 and 2026, citing demand concerns, and from $83 to $75 per barrel in Q4 2024. Notably, the International Energy Agency (EIA), which has a much lower demand growth forecast for this year than OPEC, expects Brent to average $82 a barrel in Q4. (Source: Reuters)

Global Oil Demand Revised Down

In addition to analysts' pessimistic views on oil, OPEC+ also revised its forecast for global oil demand growth in its 10 September monthly OPEC report for the second time in a row in 2024, expecting 2.03 million bpd from 2.11 million bpd this year and 1.74 million bpd from 1.78 million bpd in 2025. 

According to the cartel, China accounted for most of the downgrade following a reduced demand growth from 700,000 bpd to 650,000 bpd this year. However, forecasts have been diverging. EIA expects demand growth of 970,000 bpd this year, less than half of OPEC’s 2.11 million bpd.

Notably, OPEC announced back on 5 September its decision to delay a planned oil output increase due to oil prices falling to a 9-month low of $69 per barrel, extending the voluntary cuts of 2.2 million bpd to the end of November. Eight members, including Saudi Arabia, Russia and Iraq, will begin unwinding 2.2 million bpd in December, depending on market conditions. The decision was not officially attributed to any fundamentals, but it followed declines in oil prices and worse-than-expected Chinese data.

Conclusion

Oil prices have reclaimed the $70 a barrel level for now due to a confluence of factors, such as Hurricane Francine and ongoing turmoil in Libya impacting supply, but economic data in China continue to weigh on sentiment, resulting in downgrades.

Investors may keep a keen eye on geopolitical developments and central bank decisions this week that could impact the outlook for the world’s economies. However, with revisions in China’s GDP and oil prices stemming from economic conditions, particular attention may be given to OPEC and whether it decides to extend output cuts further.