Why Oil Hasn’t Exploded on Hurricane Ida-Induced Closures of Key Oil Productions

U.S. oil companies are still assessing the damage at the oil rigs caused by Hurricane Ida, where platforms and refineries were struck hard creating numerous damages. As Hurricane Ida approached, oil companies rushed to evacuate personnel and shut down operations in the Gulf of Mexico. As a result, more than a million households were left without electric power. Initially, Hurricane Ida was erroneously downgraded to a Category 2 tropical storm, but yesterday the assessment again became more harsh as a powerful Category 4 storm.

On Sunday, the Bureau of Safety and Environmental Enforcement reported that 95.65% of oil production in the Gulf of Mexico as well as 93.75% of natural gas production had been suspended, or temporarily closed down.

Although these numbers look really challenging, the key question for oil markets would be whether any of the infrastructure and production capacities were severely damaged. If not, Gulf producers could restart drilling and pumping in a matter of days; if equipment was broken by the storm, however, they could remain redundant for much longer.

As companies are currently in the process of checking for damage, ExxonMobil (XOM) reported that its Hoover platform was intact, and is in the process of resuming normal operations. Royal Dutch Shell has confirmed that three platforms that were in the storm's path are "all intact and on location," although they don't have an estimate for when production will resume. Other operators, including BP and Equinor, say it is too soon to provide an update.

Meanwhile, OPEC + may elaborate the decision to increase oil production, agreed last month by the coalition countries, as early as today, September 1 (on September 1, at 7:00 p.m. CET, the OPEC + monitoring committee will be held, followed by the OPEC + ministerial meeting). Participating countries preliminarily agreed to increase oil production by another 400 thousand barrels per day.

As reported, the decision to increase oil production by 400,000 bpd each month before the expiration of the 5.8 million bpd cap was made at the end of July. At the same time, the OPEC + ministers will continue to meet every month to confirm their assessment of the market situation and the adequacy of the adopted scenario.

Currently both of the main oil benchmarks, WTI and Brent, continue to creep up towards their July highs. The reason why oil isn’t exploding on Hurricane Ida and in anticipation of traditionally opinionated OPEC+ meeting is the “old good”, but totally valid, concerns about economic performance of China, Japan and a number of other key East Asian economies as rising Delta Covid cases offer very muted picture. For example, the most recent data showed that China’s manufacturing and Japan’s industrial production and consumer confidence declined. Therefore investors shouldn’t be in a rush to buy oil for now.