Oil Prices Surge 5% as Hurricane Isaias and Middle East Tanker Attacks Threaten Supply

NEW YORK - Oil prices surged approximately 5% Thursday morning as a strengthening hurricane forced significant U.S. offshore production offline while escalating attacks on oil tankers in the Middle East raised new concerns about global supply.

Brent crude futures climbed to approximately $105.20 per barrel as of 6:41 a.m. Eastern Time, an increase of 4.99%.

U.S. West Texas Intermediate crude rose to approximately $92.75 per barrel, up 5.06%.

Reuters reported that Brent reached its highest level since Sept. 29 as traders confronted two major supply risks at the same time: disruptions in the U.S. Gulf and worsening security conditions along some of the world's most important oil-shipping routes.

The rally extends a period of extreme volatility in global energy markets driven by the conflict involving Iran, reduced tanker traffic through the Strait of Hormuz and increasingly fragile supplies of crude oil and refined fuels.

Hurricane Isaias shuts down U.S. Gulf production

Hurricane Isaias strengthened early Thursday as it moved across the Gulf toward the northern Gulf Coast.

The National Hurricane Center said at 4 a.m. Central Time that Isaias had maximum sustained winds of 80 mph and was approximately 420 miles south-southwest of the mouth of the Mississippi River.

The storm was moving east-northeast at approximately 9 mph and was expected to strengthen further.

Hurricane and storm surge warnings were in effect for portions of the northern Gulf Coast as residents and offshore operators prepared for deteriorating conditions.

The storm has already caused a substantial reduction in U.S. offshore energy production.

The Marine Minerals Administration said approximately 25.08% of current U.S. Gulf oil production had been shut in as of Wednesday.

That represented approximately 511,619 barrels of oil production per day.

Approximately 16.37% of Gulf natural gas production had also been shut in, equivalent to about 350.25 million cubic feet per day.

The production reductions are precautionary safety measures as operators evacuate personnel and secure offshore facilities ahead of the hurricane.

Eight production platforms had been evacuated, along with two non-dynamically positioned drilling rigs.

One dynamically positioned rig had also been moved away from the storm's projected path.

Shell and Chevron reduce operations

Several of the largest offshore producers have already reduced operations.

Shell said it evacuated personnel and shut production at its Mars, Olympus, Ursa, Vito and Appomattox facilities.

The company also moved nonessential personnel from its Stones operation.

Chevron began shutting production at four offshore facilities and moved some personnel to shore while maintaining operations at several other sites.

Federal regulators said facilities will be inspected after the storm passes.

Production at undamaged facilities can generally return quickly after safety checks are completed, while damaged infrastructure could remain offline for a longer period.

The duration of the disruption will therefore depend heavily on Isaias's final track, intensity and effects on offshore platforms, pipelines and coastal infrastructure.

Middle East tanker attacks add a second supply threat

At the same time, conditions in the Middle East have become increasingly dangerous for commercial shipping.

Reuters reported that the week from Sept. 28 through Oct. 5 recorded the highest number of attacks, attempted attacks and harassment incidents involving tankers in the Strait of Hormuz since the current war involving Iran began.

Security sources counted at least 12 incidents during that period.

The incidents included direct attacks, attempted attacks, drone activity and aggressive communications directed at commercial vessels.

The International Maritime Organization had independently confirmed nine incidents as of the Reuters report.

One recent attack involved the Panama-flagged tanker On Peace, which was struck by a projectile while transiting the strait.

India said 12 crew members were injured.

The escalating attacks have caused shipping companies and tanker operators to reassess the risks of moving cargo through the region.

Strait of Hormuz traffic drops sharply

The Strait of Hormuz is one of the most strategically important energy corridors in the world.

Roughly one-fifth of global oil supplies normally move through the narrow waterway connecting the Persian Gulf with the Gulf of Oman.

Reuters reported that commodity-vessel traffic through the strait fell to its lowest level in more than two months this week.

Only seven commodity vessels passed through the corridor on Oct. 6, the lowest daily level since July 23.

Crude oil flows through the Strait of Hormuz fell approximately 27% to 10.1 million barrels per day.

That was equivalent to roughly 74% of the volume moving through the corridor before the current war.

Traffic recovered slightly to 10 vessels Wednesday but remained far below the more than 20 daily crossings recorded earlier in the week.

The reduction does not mean an equivalent amount of Middle Eastern oil has disappeared from the global market.

Producers have increasingly used alternative export routes and ship-to-ship transfers outside the strait.

Reuters reported that exports from the Gulf of Oman and Red Sea have risen to approximately 6.7 million barrels per day, more than twice their pre-war level.

Those alternative routes have helped keep overall Middle Eastern crude exports near pre-conflict levels despite the decline in direct Hormuz traffic.

The continuing attacks nevertheless create substantial risk because an escalation could make it more difficult, expensive or dangerous for producers to maintain those alternative flows.

U.S. inventories provide additional support

Oil prices also received support from the latest U.S. petroleum inventory data.

The Energy Information Administration reported that U.S. commercial crude inventories fell by approximately 3.2 million barrels during the week ending Oct. 2.

Stocks declined to approximately 424.1 million barrels.

Analysts surveyed by Reuters had expected inventories to increase by approximately 1.7 million barrels.

U.S. crude exports increased sharply to approximately 4.77 million barrels per day during the week.

Refinery utilization also increased to 92.7%.

Distillate inventories, which include diesel and heating oil, stood at approximately 105.1 million barrels.

Energy markets were already dealing with unusually tight diesel supplies before the hurricane threat emerged.

Gulf Coast gasoline inventories also declined to approximately 75 million barrels in the week ending Oct. 2.

Two supply risks collide

The scale of Thursday's oil rally reflects the unusual combination of domestic and international supply risks occurring simultaneously.

A hurricane-related Gulf shutdown is normally temporary, with production returning after offshore infrastructure is inspected.

The Middle East situation is more difficult for markets to assess because tanker attacks, military actions and shipping disruptions can change rapidly.

Together, the two developments reduce the amount of immediately available supply while increasing uncertainty about future production and transportation.

The effect is particularly significant because the U.S. Gulf contains major offshore production facilities, pipelines, export terminals and refining infrastructure.

A direct hurricane impact on coastal refineries or pipelines could create a more persistent fuel disruption than a temporary offshore production shutdown.

Inflation concerns return

Higher oil prices also carry broader consequences for the U.S. economy.

Crude prices affect the cost of gasoline, diesel, aviation fuel, shipping, agriculture, manufacturing and transportation.

Diesel prices have already been elevated during the current global energy disruption.

Additional increases in crude prices could eventually raise fuel costs for businesses and consumers if they persist.

That possibility is particularly significant for the Federal Reserve, which continues to confront inflation above its long-term target.

Oil prices above $100 per barrel have already contributed to concerns in global bond markets that energy costs could keep inflation elevated for longer.

Wall Street also entered Thursday with long-term Treasury yields near multidecade highs as investors considered the possibility that interest rates may need to remain elevated.

A sustained energy shock could complicate that outlook by simultaneously increasing inflationary pressure and raising operating costs for businesses.

What happens next

Energy traders will now closely watch Hurricane Isaias as it approaches the northern Gulf Coast and operators provide updated estimates of offshore production losses.

The National Hurricane Center expects additional strengthening before the storm reaches the coast.

The extent of any damage to offshore platforms, pipelines, ports or refineries will determine how quickly the shut-in U.S. production can return.

Markets will also watch tanker traffic through the Strait of Hormuz and any additional attacks on commercial vessels.

Alternative export routes have so far helped prevent the decline in Hormuz traffic from producing an equivalent collapse in total Middle Eastern oil exports.

That buffer could become increasingly important if shipping conditions deteriorate further.

For now, oil markets are confronting two supply threats at once: more than a quarter of U.S. Gulf oil production temporarily offline and increasingly dangerous conditions along the world's most important oil-shipping corridor.

Thursday's approximately 5% price surge reflects the possibility that either disruption could worsen before supply conditions begin to improve.