Oil Market Update (October 31, 2012)

Oil prices fell on Tuesday on the back of Hurricane Sandy, which reduced demand for fuel on the East Coast of the United States by keeping vehicles off roads and closing businesses.

Crude oil prices fell 74 cents to close at $85.54 a barrel Monday. The NYMEX was closed as a result of the storm, but electronic trading continued.

Some analysts are forecasting that the storm may further hit demand for crude oil and fuel products as production at US East Coast refineries is at a standstill, reducing demand for the primary input.

The supply of gasoline, diesel and jet fuel for the US East Coast was disrupted on Monday as Hurricane Sandy forced the closure of two-thirds of the region’s refineries, its biggest pipeline and most major ports, Reuters reported.

In London, Brent crude fell 52 cents per barrel to $108.92.

“If you think of it from the end-users’ standpoint, if they can’t process it then they’re going say, I’m going to store it and use it later,” said Tres Knippa, a trader at Kenai Capital Management, in an interview with CNBC. “So if you don’t have the end-users using it, that means there’s more supply and, ergo, crude going down. However, as we move into the election I am not interested being short crude at these levels.”

Meanwhile, a Scotiabank report released on Monday notes that growing competition from oil fields as far away as Colombia and Brazil is making it increasingly critical for Canada to gain access to new markets to export its oil.

The report states that on a global basis, petroleum prices and demand are expected to be stable over the next five years, but flows in North and South America will change dramatically.

“Changing oil market dynamics highlight the increasing commercial risk for Western Canada’s oilpatch of relying largely on one major export market — the United States — and the critical need to build additional pipeline and rail capacity to the B.C. coast,” wrote Scotiabank commodities expert Pat Mohr.

International investors are reportedly favoring natural gas over oil sands acquisitions in Canada as a more economical way of supplying energy to Asian markets, according to a Bloomberg analysis feature.

Three of the five largest energy acquisitions announced by foreign buyers in Canada so far this year were for natural gas assets, according to data compiled by Bloomberg.