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The Energy Report: Sliders on the Storm

Published 07/08/2024, 10:28 AM

Oil and related products are sliding on the storm as some of the worst-case scenarios of Hurricane Beryl, thankfully, won’t show up. Still, as Fox Weather reports, “Hurricane Beryl made landfall around Matagorda, Texas, at 3:50 a.m. CT Monday as a Category 1 hurricane with gusts over 80 mph and while the storm had 90 mph gusts and life-threatening storm surge, the markets believe that the storm will have more impact on demand than it will on supply."

While Texas is seeing the storm surge inundate roads and high winds will do some damage, the long-term impact on refining and oil production will be short-lived.

Reuters reported that the largest ports in Texas had closed operations and vessel traffic on Sunday to prepare for Tropical Storm Beryl. The ports of Corpus Christi, Houston, Galveston, Freeport, and Texas City said they closed after condition “Zulu” was set by Coast Guard captains on Sunday. All vessel movement and cargo operations are restricted as gale-force winds are expected within 12 hours.

Corpus Christi, about 200 miles (322 km) from Houston, is the top crude oil export hub in the United States. Texas City and Freeport also are major oil and refined products shipping hubs on the U.S. Gulf Coast. Port closures could bring a temporary halt to crude exports, oil shipments to refineries, and motor fuels from those plants.

The 52-mile Houston ship channel, which on Sunday operated under transit restrictions before halting all traffic, allows access to 8 public facilities and some 200 private terminals. Almost 14,000 customers in Texas had lost electricity on Sunday evening, according to PowerOutage.us. Power provider CenterPoint Energy said it was monitoring the storm and making preparations.

Energy infrastructure company Kinder Morgan said on Sunday that it has shut down its West Clear Lake and Dayton natural gas storage facilities and its Texas City natural gas processing facility ahead of the storm.

Freeport LNG’s liquefaction trains 1, 2, and 3 and a pre-treatment facility were proactively shut down due to impacts associated with Beryl. Plant operators later restarted them “as efficiently as possible to minimize flaring,” according to a filing with The Texas Commission on Environmental Quality.

Freeport said on Sunday that it had ramped down production at its liquefaction facility and intends to resume operations once it is safe to do so after the weather event. Liquefied natural gas producer Cheniere Energy said on Sunday that its Corpus Christi facility was operating without interruptions, but all nonessential personnel were released. “Our Gulf Coast assets have robust and proven severe-weather preparedness,” it said in a release.

Chemical maker Chemours Co (NYSE:CC), which has a production facility near Corpus Christi, said on Sunday that it has escalated its hurricane preparedness plans “to include planning for safe and adequate staffing during and after the storm and securing equipment and assets, should the storm make landfall near our site".

Enbridge Inc (NYSE:ENB), which operates large crude export facilities near Corpus Christi, said all U.S. Gulf assets were operational, adding that they had activated emergency plans.

Gibson Energy (TSX:GEI), which also operates an export facility in the area, said on Sunday all Gateway and Houston-based employees were safe, and facilities and docks were secured after the port of Corpus Christi closure.

Citgo Petroleum Corp was cutting production at its 165,000 barrel-per-day Corpus Christi refinery on Saturday, sources said. The refiner plans to keep the plant in operation at a minimum during Beryl’s passage.

Some oil producers, including Shell (LON:SHEL) and Chevron Corp (NYSE:CVX) had also shut down production or evacuated personnel from their Gulf of Mexico offshore platforms. Yet, the one thing that we do know is that even though we have seen some significant shutdowns, most of them will start reopening later today.

There is some talk that the prospect of a ceasefire deal in Gaza could lower energy prices. But it has really been a situation where the prospect of a ceasefire in Gaza seems to be a delaying tactic that we have seen time and time again from Hamas.

The AP reported that, “Several officials in the Middle East and the U.S. believe the level of devastation in the Gaza Strip caused by a nine-month Israeli offensive likely has helped push Hamas to soften its demands for a cease-fire agreement." Hamas, over the weekend, appeared to drop its longstanding demand that Israel promise to end the war as part of any cease-fire deal.

The sudden shift has raised new hopes for progress in internationally brokered negotiations. Israeli Prime Minister Benjamin Netanyahu on Sunday boasted that military pressure, including Israel’s ongoing two-month offensive in the southern Gaza city of Rafah, “is what has led Hamas to enter negotiations.”

There’s been a lot of questions about Chinese oil demand. The reality is that the demand for oil in India is continuing to be very strong. It was reported this morning that India’s demand rose 2.6% year over year to 5.3 million barrels a day. Diesel increased by 1% to 7.984 million metric tons, and gasoline demand was up 4.6% to 3.266 metric tons.

OPEC is showing signs that they are serious about production cuts. Argus reported that “OPEC+ crude output by members subject to cuts fell for a third straight month in June, as lower Russian production offset rises from some serial overproducers".

Argus said that OPEC Plus production fell by 90,000 b/d to 33.98mn b/d in June, which according to Argus estimates, was the lowest in three years. But it could have been lower, with the alliance overshooting its target for the month by 130,000 b/d.

The nine OPEC members subject to cuts were 150,000 b/d above the target in June, but this was partially offset by the nine non-OPEC members of the group, which produced 20,000 b/d below.

Leading non-OPEC producer Russia has driven much of the alliance’s output falls in the past three months, as a pre-existing export cut pledge was replaced with an output reduction. And while it reduced production by 120,000 b/d to 9.14mn b/d last month, this was still well above its target of 8.98mn b/d. Much steeper falls could be on the horizon from Russia if it makes good on a promise to compensate for producing above target in recent months.

Kazakhstan was another big overproducer last month, with its output rising by 80,000 b/d to 1.56mn b/d — 90,000 b/d above target. Despite outlining a plan to drive down output and compensate for overproducing this year, Kazakhstan has not met its target in any of the first six months of 2024.

But lower production is on the horizon, with Kazakhstan undertaking maintenance at key fields later in the year, probably in August and October, according to its initial compensation plan.

Iraq was again the alliance’s largest overproducer last month, with output rising by 40,000 b/d to 4.2mn b/d — around 200,000 b/d above target. Like Kazakhstan, Iraq has failed to meet its target in any month this year, despite also outlining a plan to compensate for producing above quota.

Rising summer temperatures boosted crude burn for power generation last month, but most of its overproduction is down due to Baghdad’s unwillingness to acknowledge surging production from the semi-autonomous Kurdish region.

Iraq and Kazakhstan’s combined overproduction has averaged 290,000 b/d this year, making their task of compensating much harder in the coming months.

In contrast, an emerging number of OPEC+ members have been unable to hit their production targets in recent months. Grappling with natural decline and upstream challenges, Azerbaijan produced 80,000 b/d below its target of 550,000 b/d in the first six months.

Malaysia also underproduced by an average of 40,000 b/d in the same period. War-torn Sudan’s production has fallen to just 20,000 b/d from pre-conflict levels of around 70,000 b/d. And South Sudan, which is entirely reliant on Sudan for its exports, has seen its production more than halve owing to the continuing war.

We think both oil and natural gas are going to see some pressure off the storm but will present good opportunities for longer-term hedges. Be patient and get ready to put on a hedge. The key thing here is that demand for oil is going to continue to be strong, and we should see significant drawdowns in in the coming weeks.

We are looking for crude oil supplies to be down 3,000,000 barrels this week and we also expect diesel supplies and gasoline supplies to be down by the same amount at 3,000,000 barrels. Refinery run should uptick by 1.0.

Fed chief Jerome Powell testifies before Congress, with inflation data due later in the week.

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