Texas continues to recover from Hurricane Harvey, and many of the disrupted refineries are ramping up production once again. But the ripple effects from the outages are still being felt, and some Midwestern refineries are benefitting from surging margins stemming from the havoc.
Bakken Midwest refining margins more than doubled between August 23 and September 1, according to S&P Global Platts, jumping from $9 per barrel to temporarily over $20 per barrel, although they have since fallen back a bit.
The margins are inflated because of gasoline shortages in certain parts of the country, the unfortunate consequence of the massive refinery outages along the Gulf Coast after Hurricane Harvey. Refining margins were also helped along by the initial downward pressure that WTI exhibited as crude oil backed up without any place to go.
That means that refineries outside of the Gulf Coast could temporarily enjoy super profits. September is typically a time of the year when refineries undergo some maintenance and retool to prepare for winter fuel blends, but few are likely to take their plants offline in this market. “Nearly every refinery outside Louisiana and Texas is operating near full capacity,” Thomas Pugh, commodities economist at Capital Economics, told the Wall Street Journal.
“Refineries outside the affected area may delay maintenance to benefit from high processing margins,” Commerzbank oil analyst Carsten Fritsch said in late August. “Hence, the negative impact on crude oil demand and oil product supply might be less severe than feared.”
Indeed, refineries unaffected by Hurricane Harvey have been called into action, but the ramp up has its own consequences. As Midwestern refineries scramble to produce at max capacity, the demand for crude is pushing up benchmark prices in the region. Bakken crude started trading at a large premium relative to WTI as supplies tightened. From S&P Global Platts:
Bakken at the Midwest hub was heard traded early at a $2.05/b premium to the calendar-month average of the front-month NYMEX light sweet crude futures contract (WTI CMA). It was also heard talked at a $2.20/b and $2.25/b premium to WTI CMA and offered as high as WTI CMA plus $7/b.
Bakken crude at the North Dakota hub also traded at a premium to WTI, the first time it has done so since S&P Global Platts tracked the data beginning in 2015. Canadian light sweet crudes also opened up a relatively large premium.
The unusual conditions for refining margins and atypical premiums for different crude blends probably won’t last. Refineries along the Gulf Coast are moving quickly to restart operations, arguably quicker than expected given the extent of the damage to the region. According to IHS Markit, as of Friday, eight of the 20 refineries that were forced offline from Harvey have resumed operations and producing at “normal” rates. Out of the other 12, all but one are in the process of restarting.
On top of that, unlike Hurricane Harvey, Hurricane Irma could have the opposite effect on energy markets, devastating a region that has little supply-side infrastructure. In other words, the destruction from Irma will linger, displacing millions and significantly disrupting the economy of the U.S. Southeast, potentially keeping millions of people from driving for a period of time. According to IHS Markit, Irma “appears to be more of a threat to demand than supply. It would not be surprising this month to see EIA weekly assessments of gasoline demand fall to levels as much as 1-million b/d lower than some August weeks.”
That may be hard to see as of now, as the lead up to the storm caused widespread fuel shortages in Florida as the entire state filled up their tanks and headed north to evacuate. Gasbuddy.com reported widespread gasoline shortages up and down the Atlantic Coast. But in the days and weeks ahead, Florida will be at a standstill, potentially disrupting fuel supplies that normally flow into the state. As gasoline shipments idle outside of Florida, it will deflate the premium for gasoline that has hit the market in the past two weeks.
In short, although it’s a bit of speculation at this point, Irma could temporarily cut into gasoline demand, which could end the tightness in the market left over from Harvey. That could also bring refining margins back down, leading to an end in the run up in margins in the Midwest.
By Nick Cunningham of Oilprice.com
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