Hurricane Harvey, the first major storm to target the US Gulf Coast since 2012, could make it more destructive to US crude and product supplies as well as port facilities than the market is currently assuming, said Barclays in a new report.

Until now hurricanes have not directly threatened the infrastructure and production associated with the US shale-inspired export boom.  Therefore its market impact from a trade, refining, and production perspective should not be underestimated, Barclays said in its latest Oil Instant Insight.

The US Gulf Coast is now exporting twice as much petroleum from the area as it did in 2012. Global demand (ex-US) is twice as dependent on exports from the US Gulf Coast than in 2012, having increased from less than 3 per cent to more than 6 per cent.  As of 2017, the 29 petroleum refineries in Texas had a capacity of over 5.4 million barrels of crude oil per day (mb/d) and accounted for 30 per cent of total US refining capacity.  Yet, the area that will be most directly hit includes five refineries that have a distillation capacity of almost 900 kb/d.

Product prices have already moved higher as people evacuate and demand more fuel and as refineries shut, thus curbing output.  US gasoline (RBOB) cracks increased more than 25 per cent as forecasts worsened for the storm, and are likely to increase further if refineries remain shut. As long as the impact of incremental product demand outweighs the impact of less production, gasoline cracks should continue to increase.

US gasoline futures rose 5.6 per cent to a two-year high on Monday as Harvey ravaged the area, said a Reuters report. Harvey has knocked out a quarter of oil production from the Gulf of Mexico, prompting fears it could overturn years of US excess oil capacity and low prices, the report added.

On the crude side, there are three potential impacts.  First, production infrastructure will likely be temporarily shut in the US Gulf of Mexico, and the Dept of Interior’s BSEE has already noted that 10 per cent of the Gulf’s output (or around 150 kb/d) has been shut in as of August 24.

“We would not be surprised if more than half is shut as a precautionary measure through the weekend.  That said, these production facilities have been hardened in the aftermath of Hurricane’s Katrina and Rita in 2005 and will likely rebound relatively quickly in the aftermath of the hurricane as long as labour can return quickly,” Barclays said in its Oil Instant Insight.

The second possible impact will be onshore, most importantly to the 1.4- mb/d Eagle Ford shale.  Given the crude oil price action thus far, the market is not fully pricing in the impact on crude supplies that the hurricane is likely to have from inland and storm-surge related flooding on infrastructure and onshore production in the Texas Gulf Coast.

The storm’s path will create high winds and localized flooding in the Eagle Ford shale basin, thereby deferring incremental drilling and completion activity.  Conoco Phillips already announced it was deferring these activities, and we believe other companies will take the same precaution.

The final impact of the Hurricane is likely to centre around trade. In the short term, pipelines that terminate in the Corpus Christi area, totalling roughly 1 mb/d according to RBN could be delayed in their return due to flooding and the likelihood that companies will want to conduct inspections before return to full service.

Also, the expectation of severe weather is deterring incremental development drilling and completion. Marathon and ConocoPhillips have already announced they are suspending operations in the region. On their own, these companies produce 170,000 per day in the Eagle Ford.   In the balance of the year, the coastal flooding may also delay the crude export infrastructure build out in the Corpus Christi area.

The severity of these impacts will have a varying effect on the widening trend in the Brent-WTI spread.  If refining and export infrastructure is delayed in its return, it could widen the spread further, while if production infrastructure is slow to return, it could tighten the spread.

Hurricane Harvey is likely to fuel bullish market sentiment through the first half of September.  If crude and refined product impacts are severe, this will impact EIA’s weekly data releases for at least this coming month, thereby adding to bullish market sentiment.  Prices have received welcome support as the physical market has tightened over the summer, staying rangebound in the $48-52/b range.

“We continue to believe that prices are likely to average higher in the second half of the year than in the first half of the year as Opec’s cuts show up in visible stocks, as low prices stimulate demand, and as the global supply-demand balance remains in deficit,” Barclays concluded. – TradeArabia News Service