By Nick Cunningham
The people along the coast of Texas are trying to assess the implications of the toxic stew that Hurricane Harvey unleashed, with exploding chemical plants and flooded superfund sites threatening long-term environmental damage to the region.
The extraordinary concentration of oil and gas facilities along the coast of Texas has long been trumpeted as an economic and energy security advantage, but in many ways, it exposes the region’s – and the country’s – dependence on fossil fuels as well as its very real vulnerability to powerful storms.
Still, Texas’ refiners are trying to get back online as quick as possible, and some have already restarted operations. As of Sunday, September 3, a combined 2.3 million barrels per day (mb/d) of refining capacity remained offline, according to S&P Global Platts, a significant improvement from the peak outages that exceeded 4 mb/d at the end of last week. The Corpus Christi refineries fared better, and thus, have come back quicker than some of the larger refining complexes in Port Arthur/Beaumont.
The ongoing outages are substantial, which will have larger and larger ripple effects the longer they remain out of commission. More than 2 mb/d of refining capacity offline means that 2 million fewer barrels of oil are being processed each day, which means that those barrels are piling up somewhere. Gasoline prices are spiking on a shortage of product, but the backup of crude will also have lasting effects.
“We could see a buildup in inventories…of 40 to 50 million barrels on the back of this refining outages, which is what’s pressing WTI prices lower,” Francisco Blanch, Bank of America Merrill Lynch’s head of global commodity and derivatives research, told CNBC. “I think WTI is going to stay weak for a while. We expect at least 40 million barrels of demand loss over the course of the whole Hurricane episode. It could be 50, it could be 60, depending on what the damage is to refineries.”
WTI has taken a hit since the Hurricane ravaged the Gulf Coast, but the decline has been only modest. Most analysts believe the effects will be short-lived. But it is still early. Forthcoming data release from the EIA will offer a clearer picture on what the Hurricane has done to U.S. oil storage, refined product supply, and oil production.
It’s anybody’s guess what the EIA will put out, and it will certainly be closely-watched. But a big buildup in crude stocks could do more to crystallize the problem for oil traders than the data on refinery outages have done up to this point.
The oil inventory figures have been one of the most important metrics driving crude prices in the past few years, and OPEC has been clear about the five-year average for inventories being the overarching target guiding its strategy to reduce supply. Saudi Arabia has even tried to reduce exports to the U.S. in an effort to try to specifically target the U.S. inventory figures.
A sudden surge in oil stocks could deflate the recent bullishness surrounding the direction of the oil market, reversing what has been months of inventory declines. It will complicate OPEC’s effort at rebalancing the market, and could add pressure on the group to extend their cuts for another 3 months, as has reportedly been considered recently.
To be sure, the bottleneck at the point of refining is starting to ease. Seven major refineries have come back online, a group that accounts for eight percent of the nation’s refining capacity. But it appears that nine refineries are still shut, and an additional four are operating at low levels. Many of them have no timetables for when they will come back online. While the country’s second largest refinery, ExxonMobil’s Baytown facility, is rebooting this week, a little further up the coast, the Saudi-Motiva plant, the largest refinery in the U.S. at 600,000 bpd, is still offline.
Many of the Gulf’s ports have started to resume operations, but most are doing so at reduced levels. While that will limit the export of both crude and refined products, it also limits the volume of imports. The effect on the data from the port interruptions will be complex and uncertain at this point.
But if a big chunk of refining remains offline, crude oil inventories in the U.S. are destined to climb, potentially dragging down WTI.
By Nick Cunningham of Oilprice.com