Oil price path ahead hinges on time to recovery for gulf refiners

Key Points
  • Spread between WTI and Brent crude oil prices has widened to largest gap in over two years
  • OPEC will most likely need to extend agreement again, says analyst
  • Brent Crude is currently trading 1 percent higher at $54 a barrel while WTI Crude is hovering around the $50 mark.
What will Hurricane Irma's wrath be on oil?
What will Hurricane Irma's wrath be on oil?

The havoc initially wreaked by Hurricane Harvey and set to be further exacerbated in the near future by other extreme weather episodes has taken its toll on the oil market with the spread between WTI and Brent prices gapping out to its widest level since May 2015.

The availability of West Texas Intermediate (WTI) crude oil has been severely compromised by recent weather patterns, due to the latter's destructive effect on the U.S. Gulf Coast refining system. In order to compensate for this shortfall, Brent oil refiners (who produce the commodity overseas) have been forced to step up, Miswin Mahesh, oil analyst at Energy Aspects told CNBC on Wednesday.

"It's been a very fluid situation on the Gulf coast…so it has been bearish WTI but we've been saying it's been constructive Brent and global greats," explained Mahesh, saying the result has been for European refineries to bid for Brent and for Dubai-linked crudes as well.

While acknowledging that there is an argument to be made that oil demand along the Gulf Coast has also been hit by the spate of hurricanes, Mahesh does see an easing of current conditions ahead.

"Give it a few weeks, once the dust settles, we will continue to see balances get constructive," he predicted.

The importance of OPEC's communication with markets
The importance of OPEC's communication with markets

While traders kept one eye on hurricane-related developments this week, they also cocked an ear to murmurings from Russia's energy minister and Iran's oil minister who suggested informal discussions to extend the agreement between both OPEC and non-OPEC members to cut production could be extended.

The deal is currently slated to expire in March 2018 but Mahesh believes they may be compelled to extend it.

"It would really help balances if they do," he noted, adding that they would seek to avoid errors made last time they extended the agreement back in May.

"They are also very careful in terms of communication because remember last time they sent signals too early into the market and the market expected much more from them," he recalled.

"So it is also a case for them to balance expectations in the market. If they already come up now and tell the market 'yes, we're going to extend the deal', the way it works is the market starts factoring in more from them - or needing more from them," he continued.

A refinery is seen during the aftermath of Hurricane Harvey on August 29, 2017 in Deer Park, Texas.
Brendan Smialowski | AFP | Getty Images

Traders being more cautious

Turning to prospects for speculative traders who have had their fingers burned a few times this year, the oil analyst explained that they are now being more cautious.

"False starts have been the theme for oil investors this year. Even at this stage we're not seeing a lot of long positions being built. It's more a case of shorts unwinding and that's creating the price movements at least for now," Mahesh observed.

However, the latest moves in the price suggest there could be a brighter outlook ahead for speculators.

"Backwardation (when the spot price is higher than the futures price) is returning to the market – that is a great sign for investors as they get the roll yield (yield gained when the futures price converges to the spot price as time passes) – and if that sustains, that's when they would start putting in, allocating more money into the oil sector," he concluded.

Oil market trading has been cautious lately with crude demand and shipments subdued due to refinery closures following Storm Harvey and the arrival of an even bigger hurricane in the Caribbean called Irma. Brent Crude is currently trading 1 percent higher at $54 a barrel while WTI Crude is hovering around the $50 mark.