GO
Loading...

Oil Markets Brace for 'Demand Destruction' After Sandy

Hurricane Sandy may inflict a negative hit to demand for crude oil and fuel products as production at U.S. East Coast refineries comes to a standstill, reducing demand for the primary input.

Henrik Weis | Lifesize | Getty Images

Meanwhile, diesel and gasoline consumption by businesses and households could also be cut sharply after New York and other large cities are shut down by the storm, reducing economic activity. Power outages lasting as long as ten days may reduce demand further.

The supply of gasoline, diesel and jet fuel into the U.S. East Coast ground almost to a halt on Monday as Hurricane Sandy forced the closure of two-thirds of the region's refineries, its biggest pipeline, and most major ports, Reuters reported.

(Read More: What Will Sandy Mean for Gasoline and Heating Oil?)

"If you think of it from the end-users' standpoint, if they can't process it then they're going say, 'I'm going to store it and use it later,'" CME floor trader Tres Knippa of Kenai Capital Management told CNBC's 'Closing Bell' on Monday. "So if you don't have the end-users using it, that means there's more supply and, ergo, crude going down. However, as we move into the election I am not interested being short crude at these levels."

On the last trading day of October, U.S. December crude rose 56 cents, or 0.65 percent, to settle at $86.24 a barrel and for the month, crude fell $5.95, or 6.5 percent, for a second straight month. Brent crude dipped 38 cents, or 0.35 percent, to settle at $108.70 a barrel. For the month, Brent fell $3.69, or 3.2 percent, a second straight monthly decline.

November RBOB gasoline futures rose 3.30 cents on Wednesday to settle and go off the board at $2.7618 a gallon, off an earlier high of $2.9375. The more-actively traded December contract rose 1.48 cents to settle at $2.6303 a gallon.

Opinion was initially divided over the direction crude and product markets will take in the wake of the worst weather event to hit New York City since at least 1938. Now, the picture appears to be getting clearer – Sandy will likely be a negative demand event overall.

"We estimate that, on balance, demand loss will outweigh supply losses," Credit Suisse analysts wrote in a note on Oct. 31. "Even gasoline prices, which are spiking, should deflate once the logistics are sorted out – which probably is in a matter of days, not weeks."

In the past, refinery outages in the Gulf of Mexico have often resulted in a spike in crude prices as refineries in other regions ramped up production, generating more demand, ANZ analysts led by Mark Pervan noted. "However, in this case, the Northeast region is home to a large population, and with infrastructure down, the existing weak underlying demand conditions and oversupply situation could be magnified."

Fuel product futures initially jumped reflecting fears that power outages and flooding could leave refiners struggling to restore operations while reports of pipeline, port and terminal operations either shuttered or reduced raised concerns of supply bottlenecks.

Colonial Pipeline said on Monday it is proceeding with its plans to shut Line 3, which runs from North Carolina to New Jersey, at 7 p.m. Monday night ahead of the arrival of Hurricane Sandy.

November gasoline futures, which expire on Wednesday, rose 5.77 cents to settle at $2.7568 a gallon on the New York Mercantile Exchange on Monday. The $2.8115 session high was the highest price since Oct. 17. U.S. November heating oil gained 1.74 cents to settle at $3.1152 a gallon, reaching its highest level relative to U.S. crude oil on record.

"With all these big closures of all these refiners on the East Coast, it's not a surprise that you're going to see crude a little bit lower and unleaded gasoline higher," Kenai Capital's Knippa said.

But longer-dated gasoline prices dipped on Monday as traders start pricing in reduced demand for fuel after the almost total shut-down of eastern seaboard roads and airports, Reuters reported.

"While the storm will shut down 6.5% of U.S. refining capacity and motorists will top off their tank the shutdown of major cities and the expected power outages may take a toll on demand unlike anything we have seen before," said Phil Flynn, Senior Market Analyst at The PRICE Futures Group.

(Read More: Sandy Also Could Wreak Havoc With Oil Refineries)

"The impact on demand may not last for hours but more than likely for days. This could be the biggest demand destruction event in history. The East Coast is by far the largest consumer of gasoline as they consumed 3,202 barrels per-day," Flynn added.

Contact Energy

  • CNBC NEWSLETTERS

    Get the best of CNBC in your inbox

    › Learn More*