Hurricane Ian Looms, But Oil Prices Fall to January Levels

Crude oil prices slide further as the U.S. dollar strengthens while Hurricane Ian could impact some refiners.

Crude oil prices fell again on Monday, reaching a nine-month low as the global economy continues to contract, China’s lockdowns continue and the demand for gasoline in the U.S. declines.

WTI oil prices reached a low of $76.79 a barrel as the decline was exacerbated by a strengthening U.S. dollar. WTI, the U.S. benchmark for crude oil prices fell by 2.65% while Brent crude futures, the international oil benchmark, declined by 2.4% to $84.05 a barrel.

Recession Fears Impact Oil Prices

Fears of a recession pushed crude oil prices further in their decline, the lowest since January.

U.S. oil production has recovered to near pre-pandemic levels and the growing likelihood of an economic downturn in the U.S. have all contributed to the slump, Bernard (Bud) Weinstein, retired associate director of the Maguire Energy Institute at Southern Methodist University in Dallas, told TheStreet.

A sluggish economy in China has decreased the country’s import of fossil fuels and a European economy that is already in recession also are major factors, he said.

Crude oil prices are not likely to fall “much further because the European Union has pledged to stop buying Russian oil by the end of the year,” Weinstein said. “Still, prices about 50 percent below their peak at the outset of the Russian-Ukraine conflict will do serious harm to the Russian economy, which relies almost exclusively on oil and gas revenues to fund government spending, including their war effort.”

U.S. Dollar Strengthens

The dollar index reached a two-decade high against a group of six currencies, which added further pressure for crude oil since it is priced and sold in U.S. dollars.

“The futures market is trying to price in a global slowdown with some demand destruction” as the summer driving season ended, Art Hogan, chief market strategist B Riley Financial, told TheStreet.

The price of oil faces headwinds as the U.S. dollar strengthens, adding downward pressure, mirroring commodities such as precious metals like gold, he said.

“The U.S. dollar is up 25% this year – the strength adversely affects multinationals,” Hogan said.

“We haven’t seen the dollar’s strength of this magnitude with the US. having a more aggressive monetary policy.”

The energy markets also never lost the output of oil produced by Russia since their supply has been sold to India and China.

China’s demand for energy products since the country has implemented a zero covid lockdown policy has pushed down demand compared to before the pandemic began since they have “not reopened in earnest,” Hogan said.

Tighter Monetary Policies Impact Prices

The global markets are experiencing synchronized monetary tightening by many central banks, implying slower global economic growth and lower oil prices, Anthony Chan, former chief economist at JP Morgan Chase, told TheStreet.

The Federal Reserve revised its real GDP growth estimates downward to 0.2% and 1.2% for 2022 and 2023, respectively.

Oil prices will face downward pressure as long as the U.S. dollar remains strong, Chan said.

“With major central banks continuing to raise rates or keeping them at high levels, oil prices could move even lower,” he said.

Prices could decline even further if Russia’s supply of oil continues to be “diverted towards China and India at discounted prices,” he said.

“Only if Russia cuts the spigots further or escalates its conflict will we see oil prices reverse their downward spiral,” Chan said.

Gasoline prices have risen slightly by 3.2 cents a gallon on average during the last week, ending the record-breaking 14-week streak of declines, the longest since 2015, said Patrick De Haan, head of petroleum analysis, GasBuddy, a Boston-based provider of retail fuel pricing information and data. The median U.S. gas price is $3.49 per gallon, up $0.05 from last week and about $0.18 lower than the national average.

Prices spiked even though crude oil prices have dropped because several refinery issues throughout the West Coast, Pacific Northwest, Great Lakes and Plains led to supply challenges.

“A slew of unexpected refinery disruptions, including fires and routine maintenance, have seemingly all happened in a short span of time, causing wholesale gas prices to spike in those areas,” he said. “Some of those areas could see prices spike another 25-75 cents per gallon or more until issues are worked out.”

Refiners in the Northeast and Gulf Coast have not faced any obstacles and gasoline prices in those regions fell.

“The disconnect between regions grows larger and will likely remain abnormal for the next few weeks until refinery issues get under control and rectified,” De Haan said.

Some refiners could experience “limited disruption” as Hurricane Ian is getting closer to the U.S. coast, resulting in mandatory evacuations in some areas of Tampa on Sept. 26.

“As a precaution, GasBuddy has activated its Fuel Availability Tracker for motorists in Florida, Georgia, Alabama and South Carolina,” he said. “Hopefully, disruptions will be very limited due to Ian, but there remain many factors driving prices both up and down across the country.”