As discussed in yesterday's post, along with the humanitarian disaster wrought by Hurricane Harvey the record flooding and its fallout have severely battered both the U.S. and global energy sectors. As of this writing the negative aftereffects continue to grow:
Hurricane Harvey continues to dump water on the Gulf Coast of the United States. Areas within Texas with major energy production and transportation infrastructure, such as Houston, Corpus Christi, and Port Arthur, have suffered major damage. The impact of this storm is now being felt across the global energy market.
As of August 29, 17 out of 26 refineries in the Gulf Coast area were offline, including the two largest refineries in the United States. In total, over 3.8 million bpd of crude oil processing has been affected. Some, including the ExxonMobil (NYSE:XOM) and Aramco refineries that process 1.2 million bpd combined, are completely flooded and have no timetable for restarting. Other refineries, such as Marathon’s (NYSE:MPC) facility in Texas City, could reduce operations due to lack of crude oil. At the same time, some refineries are starting to come back online, including Marathon’s refinery in Galveston Bay (450,000 bpd).
Reports are coming in of rising gasoline costs across the United States. In Ohio, gasoline prices are already rising between 15 and 25 cents per gallon. In the Gulf of Mexico area prices are expected to rise between 20 and 35 cents per gallon. Prices in Virginia are likely to rise by 25 cents per gallon.
The refining crisis in the United States is spilling over into the European market, with prices already rising for propane and naphtha.
Significant numbers of tankers carrying gasoline and other fuels are already heading from Europe to the United States. These tankers will have the flexibility to dock at ports on the Atlantic if Gulf Coast ports have not reopened by the time they arrive. Jet fuel is also being shipped from Asia to the West Coast to help alleviate expected shortages in jet fuel.
The flooding and hurricane damage is impacting the global crude oil trade. At the same time, refineries in Mexico and South America that depend on supplies from the United States are looking elsewhere for crude oil. Oil tankers that typically head for Houston are being rerouted to Latin America.
Parts of the Colonial Pipeline, which supplies much of the southeastern United States with gasoline and jet fuel, have been taken offline due to hurricane damage. The portion that carries gasoline to Tennessee is also dormant due to a lack of fuel. Another major pipeline, the Explorer Pipeline, which carries petroleum product from Houston to Chicago, is also mostly offline.
Other pipeline carriers are shutting down pipelines because of a lack of product since refineries halted operations. The branch of the Explorer Pipeline that runs from Oklahoma to Chicago shut down Wednesday afternoon due to a lack of supply.
The long-term impact of this weather event on the gasoline and jet fuel situation in the United States is growing more serious as the storm continues to flood major energy producing regions. Crude oil prices will likely continue to fall as oil production is continuing largely unabated. (Many crude producers, especially shale oil producers, feel pressure to continue producing even at significant losses to appease investors and creditors).
This crude will likely be backed up into storage facilities to add to the already high levels of stored crude that existed before the Hurricane. Gasoline prices, on the other hand, will continue to climb upward with over 30% of U.S. refining capacity offline for at least some time. The high price of gasoline coupled with the low price of crude could also have negative macro-economic effects that impact diverse businesses and equities if not quickly alleviated.
Hurricane Harvey and the resulting situations in the energy markets also impact the plans of global producers. There was a belief that crude was priced around $45 to $50 for the time being. If it drops further, OPEC may have to change its plans. No one has a better understanding of the energy situation in the U.S. right now than Saudi Aramco, since it owns the Motiva refinery and many gas stations (Shell brand stations in the Southeast U.S.). OPEC, Russia, and others are surely keeping an eye on the situation to determine how it may impact their plans and their existing production limits.
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