Hurricane Shifts From The Heart Of Refining Country

Market TalkThursday, Aug 27 2020
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Energy futures continue to retreat this morning as the strongest hurricane to hit the Gulf Coast in decades appears to have shifted just enough to the east to avoid damaging the heart of refining country. Equity futures are also pointed lower this morning as another weekly jobless claim report north of one million gives a dose of reality to indices that have reached record highs, despite the damage done to the economy by the COVID fallout.

Hurricane Laura made landfall overnight as a Category 4 storm, the strongest to hit the Louisiana coast in 168 years. Another shift to the east prior to landfall meant many gulf coast facilities look like they dodged most of the storms wrath, and some Houston-area terminals are already loading trucks this morning. 

Unfortunately for the residents and refineries around Lake Charles, the storm did not appear to move far enough east for them to avoid a direct hit, although it’s too soon to say what damage may have been done to those facilities, but early reports from the city suggest substantial flooding and wind damage. One of three refineries around Lake Charles was already idled due to COVID-related demand destruction, and another was running well below normal rates, so it seems that in total we may only see roughly three percent of total U.S. refining capacity damaged by the storm, compared to estimates closer to 20 percent had the storm hit further west.

Although Lake Charles is an origin point along the Colonial pipeline, as long as the Houston/Pasadena and Port Arthur/Beaumont hubs weren’t damaged, we likely won’t see any major impact on pipeline deliveries. Explorer pipeline did shut down temporarily to allow the storm to pass, but it too may see limited impact thanks to the eastward shift of the storm since it originates from the Houston and Port Arthur hubs. 

Now that the storm has passed by the majority of petroleum supply infrastructure, it may become a demand killer as it spreads flooding rains among large parts of the U.S. until re-emerging off the East Coast this weekend.

Yesterday’s DOE report was largely ignored due to the focus on the storm, but it did have some good news as demand estimates reached their highest levels since the start of COVID shutdowns, and in some cases demand has returned to the low end of the five year seasonal range. 

Note the large declines in export volumes and refinery runs in September 2017 in the aftermath of Harvey (red line in the seasonal charts below) and you’ll get a good idea of what next week’s DOE report might look like due to the widespread shutdowns ahead of Laura’s landfall. The difference in the two storms so far is that more plants and ports shut ahead of the storm, which should mean a faster recovery when it moves past barring catastrophic damage.

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The API Reported Gasoline Inventories Dropped By 898,000 Barrels Last Week

Gasoline and oil prices are attempting to rally for a 2nd straight day, a day ahead of the delayed OPEC meeting, while diesel prices are slipping back into the red following Tuesday’s strong showing. 

The API reported gasoline inventories dropped by 898,000 barrels last week, crude inventories declined by 817,000 barrels while distillates saw an increase of 2.8 million barrels. Those inventory stats help explain the early increases for RBOB and WTI while ULSD is trading lower. The DOE’s weekly report is due out at its normal time this morning. 

A severe storm on the Black Sea is disrupting roughly 2% of the world’s daily oil output and is getting some credit for the bounce in futures, although early reports suggest that this will be a short-lived event. 

Chevron reported that its Richmond CA refinery was back online after a power outage Monday night. San Francisco spot diesel basis values rallied more than a dime Tuesday after a big drop on Monday following the news of that refinery being knocked offline.

Just a few days after Scotland’s only refinery announced it would close in 2025, Exxon touted its newest refinery expansion project in the UK Tuesday, with a video detailing how it was ramping up diesel production to reduce imports and possibly allow for SAF production down the road at its Fawley facility. 

Ethanol prices continue to slump this week, reaching a 2-year low despite the bounce in gasoline prices as corn values dropped to a 3-year low, and the White House appears to be delaying efforts to shift to E15 in an election year. 

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Values For Space On Colonial’s Main Gasoline Line Continue To Drop This Week

The petroleum complex continues to search for a price floor with relatively quiet price action this week suggesting some traders are going to wait and see what OPEC and Friends can decide on at their meeting Thursday. 

Values for space on Colonial’s main gasoline line continue to drop this week, with trades below 10 cents/gallon after reaching a high north of 18-cents earlier in the month. Softer gasoline prices in New York seems to be driving the slide as the 2 regional refiners who had been down for extended maintenance both return to service. Diesel linespace values continue to hold north of 17-cents/gallon as East Coast stocks are holding at the low end of their seasonal range while Gulf Coast inventories are holding at average levels.

Reversal coming?  Yesterday we saw basis values for San Francisco spot diesel plummet to the lowest levels of the year, but then overnight the Chevron refinery in Richmond was forced to shut several units due to a power outage which could cause those differentials to quickly find a bid if the supplier is forced to become a buyer to replace that output.

Money managers continued to reduce the net length held in crude oil contracts, with both Brent and WTI seeing long liquidation and new short positions added last week. Perhaps most notable from the weekly COT report data is that funds are continuing their counter-seasonal bets on higher gasoline prices. The net length held by large speculators for RBOB is now at its highest level since Labor Day, at a time of year when prices tend to drop due to seasonal demand weakness. 

Click here to download a PDF of today's TACenergy Market Talk.