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Mark O' Donnell
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Research Analyst
August 26, 2020
 · 

Oil getting a boost from mother nature

Oil getting a boost from mother nature

Oil has recently gotten a boost in its price from Mother Nature. Tropical Storms Laura and Marco have been gaining in intensity and are approaching hurricane strength, warned the national hurricane center in Florida.

Oil licking $46

They forecast that hurricane Laura is set to strengthen over the Gulf of Mexico, with an increased risk of dangerous storms, wind, and rainfall along portions of the US Gulf Coast. This has forced around half of the oil production in the Gulf of Mexico to halt in precaution for the two hurricanes.

Brent Crude was trading just a tick above $46 a couple of hours ago – however, sits firmly above $45 a barrel, solidifying a closing of the gap left from the $10 drop in oil price when Saudi and Russia announces a price war.

Reminder: Oil is a spot commodity

This highlights something about the oil markets we sometimes forget, and that is the oil is a spot asset. Unlike equities, which discount predicted future earnings, oil does not have the luxury of taking into account earnings, beating analyst estimates, premiums, etc. Oil is directly affected by supply and demand. In this case, supply was cut due to mother nature, therefore pushing oil prices upwards.

However, it will take a lot more for oil to get back to its heydays. Even though OPEC+ and the United States took drastic measures by cutting oil supply by 10.7 Million barrel a day through the peak of the lockdowns, oil demand is still 10% lower than it was in 2019. However, in the United States, we have seen five weeks of net outflows from Crude Oil inventories, which suggest oil demand may be on in the swing of a recovery. However, in my part of the world, I’ve seen fuel prices recover close to levels pre Coronavirus.

US Crude API Inventories have had net outflows for the past 5 weeks

It is interesting to note one of the effects that low oil prices have had on the Market. Once the most valuable company in the world in 2013, Exxon Mobil, an American oil and gas corporation, has been kicked out of the Dow Jones. Exxon was the oldest company in the Dow Jones. Pharmaceutical company Pfizer and Aerospace and defense manufacturer Raytheon Technologies are also seeing the way out, being replaced by Salesforce, Amgen, and Honeywell.

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