The Long and Short Term View On Oil

Short Term View

As Hurricane Harvey closes in on the Texas coast oil and gasoline prices are rising. The natural disaster is steering towards the key US energy production terrain.

A huge flooding event is set to hit the region either late Friday or early Saturday morning and is bracing to become a major hurricane before it hits the middle Texas coast.

Disruptions to Texan refineries would have a major impact on the international price of oil, since the region has become a big player in crude oil and other refined products in recent years.

Not only does the storm threaten to slow production, with many refiners closed already, it could also damage refinery infrastructure.

Gasoline has added a stunning amount over the past week, trading at a high of $1.738 today. Crude oil, West Texas Intermediate, has gained 0.86% so far today. If we look at the international benchmark, Brent oil, you will see a 0.92% increase, with a high of $52.56.

Long Term View

Oil traders have been wrestling with an imbalance lately. While US crude oil inventories have been falling consistently over the past eight weeks, hitting the lowest level since the beginning of 2016, and additional rigs to boost output has almost paused. Meanwhile, summer demand has come in stronger than anticipated.

These factors would be traditionally bullish for oil prices. However, the spread between US crude and Brent has widened, meaning US oil producers are getting less per barrel than those in let’s say, the North Sea.

The spread measures the difference between two big crude markets. The growing distance between the two prices shows that investors expect that US shale output will continue to expand. Forecasts suggest that US shale production will meet 75% of global demand next year.

The increase in spread and the discounted price of US crude oil allows producers more scope to transport the commodity overseas, as the devaluation compared with Brent oil, covers the costs of transportation and storage costs.