A widely observed energy sector exchange traded fund was breaking above its long-term trend lines Friday as energy market participants braced for disrupted supply lines with Tropical Storm Barry making landfall off the Gulf Coast.
The Energy Select Sector SPDR (NYSEArca: XLE), the largest equity-based energy exchange traded fund, was 0.5% higher Friday, breaking above its long-term resistance at the 200-day simple moving average. Meanwhile, West Texas Intermediate crude oil futures were modestly higher to $60.3 per barrel.
The slowly building tropical storm that is expected to make landfall late Friday helped bolster energy prices this week, disrupting key energy production and refining in the region. Workers on offshore oil and gas platforms and rigs in the Gulf of Mexico have already evacuated ahead of the storm, and the Bureau of Safety and Environmental Enforcement calculated that over half the region’s oil production has already been affected, the Wall Street Journal reports.
“The crude oil market is being supported by the Gulf of Mexico production shut-in… it is going to look to see if Tropical Storm Barry becomes a major flooding event that impacts the refining sector in Louisiana and impacts gas and diesel,” Andy Lipow, president of Lipow Oil Associates, told Reuters.
While few market observes anticipate a significant long-term disruption, we may continue to see softer supply and weaker refinery activity, which helped prop up U.S. crude futures nearly 5% for the week.
The weather-related supply risks also formed alongside production cuts out of the Organization of Petroleum Exporting Countries, along with their allies, falling domestic stockpiles and rising tensions in the Middle East, notably with Iran.
However, looking further out, the energy market may find itself in a global supply glut. The International Energy Agency forecasted surging U.S. oil output will outpace sluggish global demand and contribute to a large inventory build around the world in the next nine months.
“The IEA report laid bare what the market is staring down and what OPEC is staring down next year, and really for the balance for this year, and that will continue to be a headwind,” John Kilduff, a partner at Again Capital LLC, told Reuters.
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