The Aftermath Of Hurricane Harvey

Friday September 1, 2016

In the latest edition of the Numbers Report, we’ll take a look at some of the most interesting figures put out this week in the energy sector. Each week we’ll dig into some data and provide a bit of explanation on what drives the numbers.

Let’s take a look.

1. Hurricane disrupts about 4 mb/d of refining capacity

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- As has been widely reported, Hurricane Harvey has knocked a massive amount of refining capacity offline. By some estimates, the outages have topped 4 mb/d, or nearly a quarter of the U.S.’ total capacity.
- The Saudi-Motiva refinery in Port Arthur shut down completely on Wednesday, the largest refinery in the country. ExxonMobil’s Baytown refinery (560,500 bpd capacity) was also disrupted.
- The Corpus Christi area is recovering and Houston is also starting to see water levels fall. Port Arthur saw the worst of the floods mid-week, so will take more time.
- The following companies saw refining assets affected: ExxonMobil (NYSE: XOM), Citgo, Marathon Petroleum (NYSE: MPC), Valero Energy (NYSE: VLO), Phillips 66 (NYSE: PSX) Lyondell (NYSE: LYB), Total (NYSE: TOT), Royal Dutch Shell (NYSE: RDS.A), and Flint Hills.
- The good news is that at the time of this writing, several refineries were either coming back online or were beginning the process of coming back online.
- It is still unclear what amount of refining capacity will remain offline for a lengthy period of time.

2. Oil ports shut down

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- The Gulf Coast has become increasingly vital as a global energy hub, and not just because of its refining assets. The U.S. has emerged as a major exporter of refined products, and more recently it has become a sizable exporter of crude oil.
- Houston is the U.S.’ second largest port, and crucially important to the oil trade. So is Corpus Christi, which has become the largest port for crude exports, shipping out shale oil from the Eagle Ford.
- Corpus Christi was responsible for about 22 million barrels of oil in the first quarter of 2017, or nearly a third of U.S. total crude exports.
- Both ports, as well as Beaumont, were shuttered because of Hurricane Harvey, although they could come back online soon.

3. Gasoline futures spike

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- The outage of nearly 25 percent of the nation’s refining capacity has led to fears of severe gasoline shortages. Anecdotally, shortages are showing up at some retail gasoline stations in Texas.
- The shutdown of the Colonial Pipeline – the most important artery that transports refined products to the East Coast – has led to another spike in gasoline prices.
- Futures for September delivery have surged over $2.10 per gallon, the highest level in two years.
- The hope is that the disruptions will be temporary. Some refineries, particularly around Corpus Christi, have started to come back online. But the region around Port Arthur, which includes the massive Motiva refinery, is still under water.
- The Colonial Pipeline could return to service within a few days, which could ease gasoline futures.

4. Inventory declines will take years

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- Global oil inventories are in decline, but the normalization process could take years.
- According to Bank of America Merrill Lynch, the oil market needs to see demand growth on the order of 1.2-1.6 million barrels per day (mb/d) each year for the next three years before inventories fall back to the five-year average level.
- While that pace of demand growth is totally viable, it is rather troubling that it could take three more years for inventories to come back to average levels.
- It is no wonder that OPEC has already started talking about extending their production cuts once again beyond the March 2018 expiration date.

5. Energy investors getting burned

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- The energy sector is set for its worst monthly performance in August since the end of 2015, according to the Wall Street Journal.
- Energy companies that make up the S&P 500 have declined by 17 percent so far this year, the worst performing sector in the index.
- Last year, the sector rose 24 percent, but those gains have now been erased.
- According to Morningstar, an estimated $2.7 billion flowed out of energy stock funds between January and July, a sharp contraction after seeing $5.8 billion in inflows last year.
- Even some of the strongest shale companies have disappointed this year, including Pioneer Natural Resources (NYSE: PXD).

6. U.S. pushes Venezuela closer to debt cliff

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- Last week, the U.S. government tightened sanctions on Venezuela, forbidding U.S. institutions from trading Venezuelan sovereign bonds as well as bonds from state-owned oil company PDVSA.
- The measures will prevent Venezuela from restructuring debt in the same way that they did last year to avoid default. The U.S. government is also pressuring other nations to follow suit.
- That will make it significantly more difficult for Venezuela to avoid a default.
- The problem gets really serious in October and November – over a two-month span the government and PDVSA owe a combined $3.6 billion in debt.
- The country has less than $10 billion in foreign exchange, but some analysts think that they only have about $1 billion in liquid assets.
- Based on credit default swap data, the implied odds of a debt default over the next 12 months stands at roughly 63 percent. But over the next five years, investors put the odds at 96 percent, according to Bloomberg.

7. WTI-Brent spread widens sharply

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- The spread between WTI and Brent was already widening recently, a symptom of abundant shale supply in the U.S. coupled with OPEC cuts elsewhere, pushing up Brent relative to WTI.
- But the spread has widened sharply over the past week because of Hurricane Harvey. The disruption at Gulf Coast refineries, as well as key pipelines connecting them to Texas shale fields, is trapping crude oil at the well head.
- Shale drillers are backed up with crude, dragging down WTI. Meanwhile, global demand remains robust, keeping Brent elevated.
- The gap between Brent and WTI has widened to more than $5 per barrel, the largest gap in years.
- Market forces will help narrow this differential over time. As refineries and pipelines come back online, they will begin processing at high rates, easing the glut. Also, oil traders around the world will scramble to book as many crude cargoes from the U.S. as possible, taking advantage of the discounted WTI-priced crude.
- Eventually the two benchmarks will converge.

That’s it for this week’s Numbers Report. Thanks for reading, and we’ll see you next week.