Oil Jumps As US Gulf Hurricane Spurs Short Covering By Traders

(Bloomberg) -- Oil climbed the most in two weeks as Hurricane Francine ripped through key oil-producing zones in the US Gulf of Mexico, prompting traders to cover bearish bets.

West Texas Intermediate futures rose as much as 3.1% on Wednesday, erasing most of the previous day’s plunge. 

The rise was driven by short covering after the storm prompted oil companies to shut in roughly 25% of Gulf crude output, said Dennis Kissler, senior vice president for trading at BOK Financial Securities. Exxon Mobil Corp., Shell Plc and other offshore drillers evacuated crews and suspended operations on platforms threatened by the hurricane’s lashing waves and high winds.

The storm overshadowed a bearish US government tally that showed a surprise 833,000-barrel increase in domestic crude stockpiles. An industry group had projected a 2.79-million barrel decline, and Bloomberg users were expecting a 700,000-barrel drop.

Crude has sunk by roughly one-fifth this quarter on concerns that slowing growth in the US and China, the leading consumers, is hurting energy demand amid robust oil supplies. Market metrics—including the shape of the futures curve—indicate that conditions are quickly becoming far less tight, with pockets further out making a brief foray into a bearish contango structure.

Meanwhile, Francine is expected to make landfall in Louisiana later Wednesday. In addition to offshore well shutdowns, as many as eight onshore refineries lie in the system’s potential path.

Oil's recent retreat had already seen OPEC+ postpone an output hike, stoking investor concerns that the extra barrels could be still be brought to the market closer to 2025. The International Energy Agency—which will issue a revised monthly outlook later this week—said in August the market risked higher inventories next year even if the cartel canceled the output increase.

"We’ve got closer to what looks like a high-conviction surplus for next year," Citigroup Inc. head of commodities research Max Layton said in an interview with Bloomberg television. “The market has just simply got closer to D-Day really."

Executives, traders and hedge funds gathered in Singapore this week for the Asia Pacific Petroleum Conference have been mostly bearish about crude’s prospects. Goldman Sachs Group Inc. analyst Daan Struyven said the bank expected the market to flip to a glut as soon as November or early December.

Brent’s prompt spread—the difference between its two nearest contract—has narrowed to 38 cents a barrel in backwardation. While that’s still a bullish pattern—with the nearest price trading at a premium to the next in sequence—it compares with a gap of 92 cents a month ago.