OPEC watches Hurricane Michael with bated breath

The Organisation of Petroleum Exporting Countries (OPEC), an oil cartel responsible for a third of global oil production is keenly following the movement of Hurricane Michael, a Category 4 storm, said to be strongest hurricane on record to hit the Continental United States, leading to the shut-in of over 700,000 barrels per day (bpd) production in the United States.

OPEC has been tasked to turn on the taps and dig into their spare capacity, to help shore up oil prices as US sanctions on Iran expected to kick in on November 4, is billed to turn the heat on the oil market and send prices even higher. OPEC is worried that ramping production and digging into spare capacity will severely limit their ability to respond to future disruptions, raising the risk of even bigger oil prices.

Meanwhile, Paris-based global think tank, the International Energy Association (IEA) warns that unless production increases to meet outages, the global oil market will enter a red zone.

“We should try to comfort the markets all together because it may be bad news for the consumers, importers today, but I believe it may well be bad news for the producers tomorrow.” Fatih Birol, executive director, of the IEA told journalists.

“If there are no major moves from the key producers, the fourth quarter of this year is very, very challenging.” Birol said that the run up in oil prices is occurring at a time when more red flags regarding the global economy are emerging, something that will ultimately spell trouble for the oil industry if it leads to demand destruction.

About 40 percent of the Gulf of Mexico’s oil production and 28 percent of its natural gas production was shut down as the region braced for a powerful hurricane to make landfall. But this is a precautionary measure as the hurricane missed several key production areas.

The U.S Bureau of Safety and Environmental Enforcement said the volume shut in represents roughly 718,877 barrels per day of oil production. According to a Reuters report, at least 75 platforms were evacuated, including those operated by Anadarko Petroleum, BHP Billiton, BP, Chevron and ExxonMobil.

Though the IEA expects production downtime to be brief as the crude volumes shut-in represents a small portion of total U.S production of over 10 million bpd and would have marginal impact on oil prices, fears remain.

Oil prices rallied late September seeing Brent crude break $80 a barrel, its highest level since 2014. The benchmark commodity is up 26.6 percent year-to-date, while WTI crude is up 24 percent in the same time period. Prices currently hover around $86 per barrel and could well head to $100 by the end of the year analysts warn.

“The way we’re seeing it is long dated oil prices are rising, the front-end is weakening which is telling you that hey, we don’t have a problem today, we potentially have a problem tomorrow,” Jeff Currie, global head of commodities for Goldman Sachs told CNBC.

The IEA warns that threat from oil prices would arise from geopolitical events like the US sanctions on Iran. Iranian exports fell 1.1 million bpd in first week of October down from 1.6 million in September and a far cry from its high of 2.6 million bpd in April of this year.