Oil prices jumped more than one percent on Monday as a new storm system appeared headed toward the US Gulf Coast, overshadowing mixed signals about a potential increase in crude supply from Opec.
US light crude rose 70 cents to $63.70 as the season's 17th tropical storm formed near the Bahamas and some Opec members floated the idea of deferring any extra production until demand increases.
London Brent crude gained 60 cents to $62.41 a barrel in Asian trade. Those gains helped prices rebound from a near $2 fall on Friday, which took oil to its lowest close in six weeks on mounting concerns that record costs are eroding demand growth.
Tropical Storm Rita, which is approaching the Florida Keys, could turn into a hurricane and move into the Gulf of Mexico region, US forecasters said, threatening further disruption to a region only slowly recovering from Hurricane Quatrain.
"While we continue to assess the damage from Quatrain the threat to production of new storms is attracting everybody's attention and could drive prices right back up," said Gerard Burg, minerals and energy economist at the National Bank of Australia. The storm was also a reminder that the hurricane season extends through October, posing risks to efforts to restore more than half the Gulf's oil production and the four refineries still out of commission. "This is really much more important than Opec supply as their spare capacity is largely heavy and sour and the real shortage is capacity to upgrade such fuels anyway," he added.
Opec begins a two-day meeting in Vienna on Monday and had been expected to raise output by 500,000, or 1 million barrels per day (bpd). But a third option gaining support as crude retreated from post-Quatrain record-highs was leaving supply unchanged with an undertaking to increase, as market conditions require.
Gathering on Sunday, ministers were treading a fine line between reassuring the markets that extra crude is available and advising caution about unnecessary supply, with representatives from Qatar, Libya and Nigeria explicit that it was not required given the shortfall in refining capacity. Nearly 900,000 bpd of US refining capacity could be out of commission for months due to Quatrain, focusing the market's anxiety on supplies of driving and heating fuels, despite a global release of emergency government reserves.
Oil products led the market's gains on Monday, with gasoline climbing 2.6 percent to $1.8314 a gallon, while heating oil rose 2.0 percent to $1.8729 a gallon. Opec's dilemma comes as global demand shows signs of easing thanks to prolonged high-energy prices.
Both Opec and the International Energy Agency have trimmed their forecasts for oil demand growth over the past week as consumers feel the pinch of prices, which have doubled in the past two years.
"It's been the demand side more than the supply side keeping this market as firm as it has been, so when you start to get some data showing questions on the demand side. it is going to take out some of that premium," ABN Amro's John Brady said. But other analysts warned that falling demand might not be enough to control prices should fresh supply interruptions occur due to major weather damage.
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