Oil jumps nearly 3% as Gulf Coast storm forces output cuts

U.S. oil drilling site
David McNew | Getty Images

Oil prices rose nearly 3% on Tuesday, supported by hurricane supply disruptions in the United States, but demand concerns loomed as energy industry forecasters predicted a slower-than-expected recovery from the pandemic.

Brent crude rose 92 cents, or 2.3%, to $40.53 a barrel, while West Texas Intermediate crude futures gained $1.02, or 2.74%, to settle at $38.28 per barrel. Both contracts fell on Monday.

Futures gained ahead of Hurricane Sally's expected landfall on the U.S. Gulf Coast. More than a fifth of U.S. offshore oil production was shut and key exporting ports were closed as the storm's trajectory shifted east toward western Alabama, sparing some Gulf Coast refineries from high winds.

"Harsh weather events in the U.S. cause some unpredictability about its oil production and that's always good news for prices," said Bjornar Tonhaugen, Rystad Energy's head of oil markets.

But oil demand's outlook remains weak, which limited gains during the session. The International Energy Agency (IEA) on Tuesday trimmed its 2020 outlook by 200,000 barrels per day (bpd) to 91.7 million bpd, citing caution about the pace of economic recovery.

"We expect the recovery in oil demand to decelerate markedly in the second half of 2020, with most of the easy gains already achieved," the IEA said in its monthly report.

The agency said commercial oil stocks in the developed world hit an all-time high of 3.225 billion barrels in July, and cut its forecast for implied stock draws for the second half of the year.

The IEA's demand revision aligns with forecasts from major oil industry producers and traders. OPEC downgraded its oil demand forecast and BP said demand might have peaked in 2019.

World oil demand will tumble by 9.46 million bpd this year, the Organization of the Petroleum Exporting Countries said in a monthly report on Monday, more than the 9.06 million bpd decline OPEC expected a month ago.

Still, a meeting of the OPEC+ joint ministerial committee on Thursday is not expected to make recommendations for deeper output cuts, but focus rather on compliance and compensation mechanisms for its current cuts, sources told Reuters.

Meanwhile, China's crude oil throughput in August rose from a year ago, reaching its second-highest level on record, as refineries worked to digest record imports earlier this year.

Investors awaited industry data due later on Tuesday that was expected to show U.S. crude inventories rose last week.