The power outage that took BP’s refinery in Whiting, Indiana, offline for at least three weeks has delayed a potential price jump by dampening demand expectations in the immediate term.
The 400,000-bpd facility is the largest refinery in the Midwest—and its temporary shutdown will lead to an increase in crude inventories, traders expect—and they are acting accordingly.
Reuters’ John Kemp reported that in the week that followed the February 1 outage at Whiting, traders sold some 62 million barrels of West Texas Intermediate. Sales of Brent were much lower, at 23 million barrels. As a result of the selloff in WTI, institutional traders’ total position in the contract fell from 117 million barrels in the week ending February 1 to 55 million barrels as of February 6.
The Whiting refinery, with a total capacity of 435,000 barrels of crude daily, experienced a site-wide electric outage that prompted a shutdown to assess the situation and inspect the facility for damage. In case no damage is found, the refinery will restart operations. Inspections are set to take at least three weeks.
Besides the accumulation of crude that seems unavoidable and is prompting traders to dump their oil contracts, the Whiting shutdown will also likely tighten fuel inventories regionally and—by extension—nationally. This notably includes middle distillates that are already in relatively short supply.
In fact, distillate supply has been so tight that even two consecutive weekly inventory builds of several million barrels each at the end of 2023 could not push these toward the seasonal average. And this year, Reuters’ Kemp warned in an earlier column, demand for diesel is about to increase.
This is because manufacturing activity in the United States is beginning to recover from a prolonged lull—which, by the way, was the only thing that spared the economy from a diesel shortage. In anticipation of that rebound, traders had substantially increased their positions in diesel contracts, Kemp wrote a week ago, with the total at some 56 million barrels as of February 6.
This basically sets the stage for a diesel shortage because refining capacity since the pandemic has declined as refiners turned their facilities into biofuel production plants or shuttered them. Last year, capacity inched up for the first time since 2019, by 1% to 18.1 million barrels. Apparently, this was not enough to boost the supply of the fuel that some call the workhorse of the economy, and stocks of diesel and other distillates remained subdued throughout the year and into 2024.
A shortage can still be avoided, however. In late 2022 and early 2023, there were grim warnings of a diesel shortage because of what was then expected to be the continued post-pandemic rebound of the economy. This rebound did not happen because of rate hikes and inflation, the silver lining being the avoided diesel shortage.
This year, much of the expectation for a recovery in manufacturing activity hinges on rate cuts that the Fed has so far signaled it is not yet prepared to make. This means that the recovery could be slower and more moderate than previously expected, with the silver lining of avoiding a diesel shortage, at least for a while. Because when the Fed does start cutting rates that diesel demand is going to jump.
For now, it seems the central bank is not too keen on the idea, but some of its regional heads expect a rate cut in the summer. Atlanta Fed President Raphael Bostic recently told CNN that with forecasts that inflation will decline from 3% to below 2.5% by the end of the year, the first rate cut could come in the summertime. Right now, interest rates are at the highest in 23 years. Once that changes, fuel demand is likely to rise—and so is oil and fuel buying among institutional traders.
By Charles Kennedy for Oilprice.com
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