Benchmark oil prices may draw just temporary support from production shutdowns in the Gulf of Mexico as the U.S. government shutdown drags on, according to CNBC's latest market survey of traders, analysts and strategists.
Oil output in the U.S. Gulf of Mexico has been cut in half as oil and gas firms shut platforms and evacuated some workers in preparation for Tropical Storm Karen, Reuters reported on Friday, October 4. Authorities issued mandatory evacuation orders for low-lying areas south of New Orleans on Friday as a weakened Tropical Storm Karen closed in on the Louisiana coast, Reuters said.
Despite a near one-percent gain last week for crude benchmarks on both sides of the Atlantic - reflecting the Gulf of Mexico storm-related outages - prices are likely to trend lower as the U.S. government shutdowns drags on, raising fears of the impact on economic activity and energy demand.
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"[The] U.S. economy [will] slow from the Washington mess...so oil is under pressure," said David Kotok, Chief Investment Officer at Cumberland Advisors with $2.3 billion assets under management.
Almost half of the respondents in CNBC's latest poll of oil market sentiment (45 percent, or 9 out of 20) believe prices will fall this week, 25 percent (or five out of 20) say prices may gain and six out 20 - or 30 percent, are 'neutral' and expect prices to trade around current levels.
"Tropical Storm Karen will put a floor under WTI (West Texas Intermediate, the grade of crude oil that defines the U.S. crude futures contract) and encourage buying on dips for an insurance trade going into the weekend," said David Nevin, a London-based broker with XConnect Trading Ltd. on Friday. The Gulf accounts for about 19 percent of U.S. oil production and six percent of natural gas output.
However, UBS strategists noted that the storm appears to be losing intensity, taking some of the 'weather premium' out of the market: "With Karen expected to be a strong tropical storm at landfall, significant wind damage to refineries and platforms is unlikely," said UBS commodity strategists Dominic Schnider and Giovanni Staunovo. "As soon as production resumes, we could see the oil price marginally declining." The Swiss bank expects Brent crude to moderate towards $100 a barrel in 2014 "with the supply side improving."
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Oil traders are "watching the U.S. budget talks with interest," Nevin said, "as the longer the government stays shut, the larger the impact will be on the energy markets." Moreover, if oil market-sensitive regulatory and government data such as position reports and inventory levels are withheld from the market, "you will see volumes dwindle and increased volatility."
U.S. oil ended Friday 53 cents higher at $103.84 a barrel after trading as high as $104.19. The front-month contract ended the week with a 0.94 percent gain. "I'm looking for oil to drift lower and actually got short December WTI at $103.89," said Mark Waggoner president of Excel Futures, a commodities-trading firm based in Bend, Ore.
Brent crude oil ended 46 cents higher at $109.46 a barrel, after trading as high as $109.77. Brent ended the week less than one percent higher, following three weeks of losses.
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"On the upside, the (Brent crude) market needs to push through $110.09 to see further gains towards $110.70," XConnect's Nevin said. "For the week ahead we watch the U.S. dollar and stock markets as a guide but I expect a sideways to slightly higher price action."