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Hurricane Harvey Is A Disaster For OPEC

OPEC

The skies are clearing over Houston, but the damage from the remaining elements of Hurricane Harvey has spread east to Port Arthur and Lake Charles along the Texas-Louisiana border. That has knocked more refineries offline, including the largest refinery in the United States.

In the aftermath of the storm, the most serious threat to the energy industry is the extended outage of refineries and pipelines, according to Goldman Sachs. The problem actually looks worse than it did earlier this week as the deluge has shifted towards Port Arthur, another refining hub. Motiva, which runs the U.S.’ largest refinery in Port Arthur, began to completely shut down its 600,000 bpd facility on Wednesday.

Goldman says the refinery shut downs, as of August 30, have spiked to 3.9 million barrels per day (mb/d), although upstream oil production outages have dropped below 1 mb/d. More ports are now closed – in addition to Corpus Christi and Houston, the ports of Lake Charles, Beaumont, and Port Arthur have shut down.

These outages, the investment bank says, will mean that the “ongoing recovery in production will only be partial.” The refinery and pipeline closures are “leaving the oil market long 1.9 mb/d of crude vs. last Thursday, short 1.1 mb/d for gasoline and 0.8 mb/d for distillate.” Related: Venezuela’s “Oil Fire Sale” To Benefit Russia, China

More worrying is that the recovery might not be quick. While most refineries had controlled shut downs, there are quite a few, especially in the Port Arthur region, that have been inundated with water, which means that the damage to them is still unknown. Based on the past major hurricanes of Rita and Katrina, Goldman speculates that about 10 percent of the 4 mb/d of refining capacity that has been disrupted will remain offline for several months.

Other analysts agree that the damage could result in lengthier outages than many had hoped. “I'm actually quite concerned about Beaumont-Port Arthur because they just got a huge amount of rain in 24 hours, and we've already seen flooding within the refineries themselves, so we don't know exactly how bad it's going to be,” Andy Lipow, president of Lipow Oil Associates, told CNBC. “If it is bad, you're looking at six to eight weeks of outages over in Beaumont-Port Arthur.”

Ultimately, that could mean that upstream oil producers will be unable to return to full production. Damage to pipelines, storage and processing facilities will also inhibit a full recovery. "It will be a while before operations can return to normal and the U.S. refining industry is bracing itself for an extended shutdown," Stephen Brennock of PVM wrote in a research note.

The prospect of lasting damage to the energy industry is sinking in. “Back to normal is months, not weeks, for exports and for the industry and the region. We have to acknowledge that,” Barclays analyst Michael Cohen wrote.

While much of the focus is (rightly) centered on the effect on gasoline supply, the refinery outages could eat into crude oil demand for quite some time. In fact, on balance, Goldman says that the supply outages could be outweighed by the destruction of demand. Houston alone accounts for around 750,000 bpd of oil demand. Goldman Sachs estimates the region will see demand fall by about 0.7 mb/d in the first month after the storm.

Related: Oil Prices Rise As Texas Braces For Hurricane Harvey Landfall

That will make “it harder for OPEC to rebalance the market and maintain bullish sentiment," Barclays' analysts said. OPEC has been struggling to drain inventories for almost a year, but without a substantial portion of U.S. refineries online, inland crude oil storage facilities in the U.S. could fill up once again. And the dip in demand could mean OPEC’s time horizon for balancing gets pushed out a bit more into the future, just as the cartel was hinting that it might have to extend its production cuts anyway.

But the problem is more complex because U.S. data will be much “noisier and less useful as a high frequency indicator at the very time OPEC needs it most,” Barclays says. Storage might increase, refinery runs will bounce around, production figures will edge up slowly – in short, the trend lines that the market has become accustomed to will be all out of whack. And because the U.S. offers the most transparent data, closest to real-time as one can get, it has an outsized impact on market psychology. The data will be really messy for weeks to come, which will complicate OPEC’s strategy.

By Nick Cunningham of Oilprice.com

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  • Robert on August 31 2017 said:
    The hurricane is helping rebalancing, not hurting it. The loss of production outweighs the loss of retail gasoline demand by a wide margin. Sure, gas inventories may draw, while crude builds, but this is only temporary. At the end of the day, the total liquids inventory is drawing down faster than it otherwise would have.

    I have yet to see an article which points this out. They all just parrot the same shortsighted nonsense.
  • Josh Gregner on August 31 2017 said:
    I guess this shows an underappreciated risk of oil / gasoline: power is much easier / quicker to restore than oil supply chains and with increasingly extreme weather phenomena, people who want to have mobility in the next hurricane are well advised to go electric for their cars.

    I for one can't wait to get a Bollinger Motors B1 truck. That thinig would be perfect in any natural disaster.
  • William Humphries on August 31 2017 said:
    I own a gas station. I was told today that it's going to cost me 2.49 for regular. Before the storm it was 1.89. I check crude price and it is still 45.9 a barrel. Same as last week. I believe I am being out priced as an independent / taken advantage of(price gouging) I told them it's noway I can resell it when sheetz is selling there gas for 2.19 and that I would just bag my pumps until the price is competitive. Making 3-10 cents a gallon just isn't worth it. May God have mercy on there soul.
  • rjs on August 31 2017 said:
    agree with Robert. unless final demand for gasoline and diesel changes, Harold is a wash.
  • Eduardo on August 31 2017 said:
    Price will be affected by fast or slow the sector recovers from disaster, however Wall Street's speculators are betting for a bullish market while others trying to politicize market conditions against OPEC but at the same time quietly expecting a price prices to remain the same. Volatile conditions will continue for now on. Climate change is real and this may start a downward spiral trajectory of price and offshore production from now on because costs can be unbearable if another event shuts them down within next five years.....
  • Naomi on August 31 2017 said:
    2 million people in Houston are not driving much.
  • CMS on September 01 2017 said:
    Climate Change may be real but at 0 .184 degree increase per decade, it is not going to lead to any noticeable change in the next 10 to 20 years http://images.remss.com/msu/msu_time_series.html
  • Patrick on September 03 2017 said:
    Good post recently about usable vs unusable crude. A lot of crude is used to keep pressure in pipelines and essentially non-usable. Production is down. Refineries are coming back on line fairly quickly. Imports were slowed, as were exports, but recovering quickly. Venezuela is no longer allowed to trade in USD, Libya output interrupted Again...Iraq coming down in production. There are so many catalysts for an up move in crude... there will be a price spike eventually, spurred on by speculators manipulating the market for short term gains. The spread between WTI and Brent is the largest it has been in awhile. We all just want a stable reasonable price for crude... spikes, while good for crude companies in the short term are bad for economies long term. Anyway.. I would love to see 1 article that paints the entire picture instead of 1 thing or another and without some clickbait headline on the article. :) Just my opinion... don't hate.
  • Thomas Blazek on September 05 2017 said:
    The value of the US Ethanol Industry was clearly shown this past week. In spite of losing something like 18 refineries along the Gulf Coast, representing something like 25% of US Refining Capacity, we didn't loose a single Ethanol Production Plant. Most Ethanol Plants are up in the Midwest and they are all still running! Ethanol Futures are going for about $1.57 a gallon. Ethanol with an octane rating of 113, yes that is correct 113, is a wonderful blending agent for gasoline. Perhaps this shows the wisdom of selling ethanol blended fuels. Secure supply, low price, supper high octane. Oh ya, reduces air pollution too! What more can you ask for?
  • Hillary on September 06 2017 said:
    Thomas Blazek if Ethanol is so good why do I get less fuel mileage and why does it destroy all my small engines on lawn equipment and ATVs? Why use a food source as fuel?

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