— This is the script of CNBC's news report for China's CCTV on August 29, Tuesday.
Overnight trading saw WTI going down by more than 3% due to the recent Hurricane Harvey that hit the Texas, a U.S energy state. The hurricane led to closure of major U.S oil refineries, causing the demand of crude to fall as well as putting pressure on oil prices. At the same time, the WTI and Brent spread widened overnight, to more than USD5.
Analysts believe that this is due to the impact of US climate factors on the market. It will be temporary and the spread is expected to go back to previous levels after the hurricane.
[Matt Smith, Director of Commodity Research, Clipperdata] "We are seeing about 20 million barrels waiting offshore in the U.S gulf. We've got these tanks basically in holding position there, waiting for these refineries to reopen, so we will see more tankers heading that way. Another thing we are seeing as well is tanker diversion and so gasoline cargoes are heading to the East Coast because they are not receiving their gasoline from the gulf coast."
Analysts have also said that as the weather picks up by this week, oil refineries may start operating again. This may ease off some pressure on the U.S WTI oil prices. Another positive factor is that Russia and Saudi Arabia are reported to jointly extend oil output cuts. This will allow oil prices to swing to a more positive note. According to Wall Street Journal, Saudi Arabia and Russia proposed to extend oil cuts by three months till the end of June 2018. Both these oil-producing giants were also seeking support from other oil-producing countries to extend the deal to cut crude oil production. Yet, whether the final extension will be supported remains a big question as OPEC members appear to at odds.
A report from the International Energy Agency (IEA) stated that compliance rate with OPEC's output cut fell to 75%, the lowest since January. Algeria, Iraq and United Arab Emirates, reportedly, were the least efficient in lowering output. The rapid growth of U.S shale oil production also put pressure on oil prices, intensifying the short-term imbalance of crude oil demand. In addition, due to continued improvement of shale oil production technology, its production costs are rapidly decreasing, drawing closer to some of OPEC oil production costs. This may force OPEC to respond and make adjustments to the cuts, and withdraw from the OPEC cut deal. That's why we have been seeing oil prices capped under USD50 per barrel.
Lastly, another short-term positive factor is Libya facing the threat of supply disruption. A pipeline blockade by armed groups forced two Libyan oil fields to shut down, further disrupting OPEC's plan for Libya to cut its production. The Sharara oil field, Libya's largest, as well as Africa's largest crude reserves, has been closed for about a week and has not resumed operations. If Hurricane Harvey subsides, OPEC's production cut deal sees new hope for an extension , or if the oil supply disruption worsens in Libya, we might see oil prices starting to rebound. We will continue to keep watch. CNBC's Qian Chen reporting from Singapore.