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Goldman: U.S. Oil Sector Could Take Months To Heal From Harvey


Oil markets were roiled, sending gasoline prices surging on Monday after Tropical Storm Harvey wreaked havoc along the Gulf Coast over the weekend, crippling Houston and its port, and knocking out numerous refineries as well as some crude production. As noted on Sunday, gasoline prices hit two-year highs as massive floods caused by the storm forced refineries in the area to close. Meanwhile crude futures fell as the refinery shutdowns could reduce demand for U.S. crude production. As a reminder, Texas is home to 5.6 million barrels per day (bpd) of refining capacity, and Louisiana has 3.3 million bpd. Over 2 million bpd of refining capacity was estimated to be offline as a result of the storm.

While the U.S. National Hurricane Center said Harvey was moving away from the coast, it was expected to linger close to the shore through Tuesday, and that floods would spread from Texas eastward to Louisiana.

As Reuters reports, U.S. traders were seeking oil product cargoes from North Asia with transatlantic exports of motor fuel out of Europe expected to surge. “Global refining margins are going to stay very strong,” said Olivier Jakob, managing director of Petromatrix. “If (U.S.) refineries shut down for more than a week, Asia will need to run at a higher level, because there’s no spare capacity in Europe.”

At the same time, about 22 percent, or 379,000 bpd, of Gulf production was idled due to the storm as of Sunday afternoon, the U.S. Bureau of Safety and Environmental Enforcement said. There may also be around 300,000 bpd of onshore U.S. production shut in, trading sources said.

In a note released this morning, Goldman's Damien Courvalin calculated the estimate near-term impact from the "devastating" fallout from Harvey. As Courvalin writes, data available so far point to sizably larger refining than production disruptions: as of Sunday, August 27, nearly 3 mb/d of refinery capacity was offline (16.5 percent of the 18.2 mb/d US capacity) vs. c.1 mb/d of crude production (11 percent of 9.3 mb/d current production) and 2 Bcf/d of gas production (3 percent of 72 Bcf/d current production). Related: Kurdish Independence Could Deal A Major Blow To Oil Markets

Should these levels of outages remain in place, and using past hurricanes as proxies for the impact on oil demand, Goldman estimates that the impact of Harvey on the U.S. oil market would be to increase domestic crude availability by 1.4 mb/d while removing 615-785 kb/d of gasoline and 700 kb/d of distillate supplies. Larger refinery outages would increase these long crude and short product impacts.

Should the storm continue to head East towards Houston, as forecasts project, it risks creating further refinery outages with 850 kb/d of capacity in Houston not yet reported offline.

The hurricane is therefore likely to lead to further strengthening in product cracks given the loss in domestic refined product supply. The loss of USGC refining capacity will further support refinery margins for non-affected refiners to incentivize them to operate at higher utilization. The hurricane will however lead to a weakness in domestic crude prices given the lack of refining outlet. From a global oil supply-demand perspective, the storm is likely to lead to higher crude and product inventories over the next couple of months given the likely larger hit on US demand than supply.

(Click to enlarge)

The impact on production is far smaller, with 1 mb/d of crude production offline (11 percent of 9.3 mb/d current production) and 2 Bcf/d of gas production (3 percent of 72 Bcf/d current production). The flooding currently taking place is however leading to a greater loss of onshore supply (from the Eagle Ford) than historically has been the case. Gulf of Mexico production was instead spared by the path of the hurricane. Historically, onshore production has rebounded faster than offshore production and this would be consistent with producer commentary that loss of production is due to preventive shut-ins for now.

(Click to enlarge)

Finally, the ports of Corpus Christi, Galveston, Houston (inc. East), Texas City, Freeport and Galena Park remain closed. According to Reuters data, these ports averaged so far this year: 600 kb/d of crude net imports, 250 kb/d of gasoline net exports and 250 kb/d of distillate net exports.

(Click to enlarge)

And some additional observations:

Should these levels of outages remain in place, and using past hurricanes as proxies for the impact on oil demand, we roughly estimate that the impact of Harvey on the U.S. oil market would be to add 1.4 mb/d of crude while removing 615-785 kb/d of gasoline and 700 kb/d of distillate. Larger refinery outages would increase the long crude and short product impacts.

- Refinery crude intake is down 3 mb/d with oil production down 1 mb/d and net crude imports down 0.6 mb/d. As a result, every day these outages remain in place, US crude inventories increase by 1.4 mb due to the hurricane.

- Gasoline production is down 1.25 mb/d (assuming yields of refineries disrupted are in line with the Texas Gulf Coast EIA sub-PADD 3 region) with net exports down 0.25 mb/d. Our analysis of the past 10 hurricanes to hit Texas/Louisiana showed that total oil demand falls for c.3 weeks and that in the monthly data, the loss of gasoline demand is 150 kb/d on average. This implies a daily loss in gasoline demand of 215 kb/d each day during these three weeks. This would leave the U.S. gasoline market short 785 kb/d as long as current refinery and port outages stay at current levels. Should monthly gasoline demand fall 270 kb/d as it did during the month when hurricane Ike hit the USGC, the US gasoline market would be short 615 kb/d instead due to the hurricane.

- Distillate production is down 950 kb/d with net exports down 250 kb/d. Our analysis of the past 10 hurricanes to hit Texas/Louisiana showed that distillate demand was on average flat after the hurricane, supported by reconstruction and power generator demand. This would leave the U.S. distillate market short 700 kb/d due to the hurricane as long as current refinery and port outages stay at current levels.

(Click to enlarge)

Related: Texas Oil Production Remains Strong…But For How Long?

These impacts will likely lead to crude accumulating in the U.S., and more specifically in Cushing as pipe flows to the USGC are set to decline. This could weigh further on the WTI-Brent differential by weakening the U.S. leg (long oil now) and strengthening the offshore market (with stronger refinery runs there). Gasoline and distillate cracks are likely to strengthen.

Overall, the impact of hurricane Harvey on the oil market (total demand vs. total supply) is likely be of higher oil inventories over the next couple of months. First, onshore U.S. production typically normalizes in the month after a hurricane (as most wells are preventatively shut-in) while historically the impact on demand lasts several months. Second, the historical declines in demand observed during strong hurricanes Rita-Katrina (-1.0 mb/d the first month) and Ike-Gustav (-1.4 mb/d) are larger than the onshore (and currently observed) declines in oil production. Two caveats to this historical template: the proximity of these pairs of hurricanes overstates the demand impact while the magnitude of the onshore production impact of Harvey is unprecedented.

By Zerohedge.com

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