As the remnants of Hurricane Harvey continue to wreak havoc in the Southern US, we provide an update on the storm's impact on Gulf Coast crude and refining markets. With crude oil production starting to come back online in the Gulf of Mexico our outlook for crude supply has improved slightly. At the same time, our forecast for product markets has worsened significantly.

Since our initial Monday morning assessment, the storm has knocked out additional refining capacity in Eastern Texas and continues to threaten Louisiana refineries. Currently, about 4.2 million b/d of refining capacity stands idled. Product spreads have continued to spike due to shortages resulting from closures of major ports and export pipelines, including the Colonial and Explorer pipelines.

More Refining Capacity Goes Offline
Since Monday, when roughly 2.2 million b/d of Texas' more than 5 million b/d of refining capacity had been shuttered, further refinery closures have brought this figure to about 4.2 million b/d. While refineries in the Corpus Christi region, which account for nearly 950,000 b/d of capacity, seem to have escaped the storm largely unscathed and will likely ramp up operations within a couple of weeks, refineries in the Houston and Port Arthur areas were battered. In addition to the four Houston area refiners with a combined capacity of over 1.2 million b/d that had already shut prior to Monday, Marathon's 460,000 b/d Galveston Bay refinery and LyondellBasell's 265,000 b/d Houston refinery announced reductions in run rates.

Meanwhile, as the storm moved Eastward from Corpus Christi and Houston, refineries in the Port Arthur/Beaumont region, including ExxonMobil's 362,000 b/d, Motiva's 615,000 b/d, Total's 231,000 b/d, and Valero's 250,000 b/d, have reported either full or partial shutdowns.

Even though the storm is weakening, much of Louisiana's 3.3 million b/d of refining capacity could be threatened, particularly the more than 750,000 b/d of capacity in the Lake Charles region. Activity at Citgo's 440,000 b/d Lake Charles, LA refinery has been reduced. As of now, other Louisiana refiners have not announced any closures but if the storm causes severe flooding in Lake Charles, New Orleans, or Baton Rouge, this will change.

Product Takeaway Capacity Disrupted
Reduced activity at Texas refineries has severely disrupted flows on product pipelines that ship gasoline, jet, and diesel to the East Coast and Midwest. The 660,000 b/d Explorer Pipeline, which carries gasoline, middle distillate, and fuel oil from the Port Arthur, TX region to the Midwest via Houston, TX has been shut down. PADD II refiners will look to increase runs to address this shortfall of product.

The roughly 2.5 million b/d Colonial Pipeline, which ships product from Houston, TX to much of PADD I via Port Arthur, TX and Lake Charles, LA, has been running at reduced capacity but is in the process of being entirely shut down. The restart of refineries in the Gulf Coast will dictate operations on the Colonial pipeline.

In addition to reduced flows to PADD I and II in the US, Gulf Coast port and terminal closures will also reduce exports to Latin America.

Product Spreads Continue to Spike
With more refining capacity down, ports still closed, and flows on product pipelines disrupted, product spreads have spiked. The NYH RBOB spread to Brent now stands well over $30, more than double its level from the beginning of last week.

With product shortages expected through PADDs I, II, and III of the US as well as throughout Latin America, European and, to a lesser extent, Asian refiners should take advantage of very profitable spreads, raise throughput and send more product to these areas to make up for the shortfall.

A shortfall of product deliveries to consumers in the U.S. and Latin America, will spur a large drawdown in stocks throughout the Americas and Europe. The drop in European product stocks will be caused not only by attractive export opportunities, but also by the need to offset lost diesel imports from the USGC to feed European demand.

Crude Production Outlook Improves Slightly – But Depends on Offtake Ability
U.S. crude production is slowly coming back online in the Gulf of Mexico. The latest figures show the amount shut-in has declined from 380,000 b/d on Monday to about 324,000 b/d currently. As more offshore platforms resume operations in the following days, the number of barrels offline from the GOM will continue to fall. Hampering efforts to fully resume production levels in the western Gulf of Mexico is the closure of the CHOPS pipeline system that carries offshore crude from the outer continental shelf in the Gulf to the Houston area, with connector lines to Texas City and Beaumont.

Onshore production, also depends on the status of midstream and downstream operations. Some Eagle Ford producers have reported they are in the process of resuming some operations, but the estimate of about 500,000 b/d offline currently remains in place for the next several days at least The KMCC and Double Eagle pipelines that move crude from the Eagle Ford to the Houston area is reportedly accepting crude receipts at some of its loading points in the Eagle Ford area, but cannot yet deliver volumes to Houston.

Producers with access to storage tanks will be better able to resume operations while pipelines are not running at capacity. Two major long haul pipelines, that move Permian crude to the Houston area, representing about 600,000 b/d of capacity have been shut. More pipeline closures or curtailments are likely while refineries in the Houston and Port Arthur areas are unable to accept deliveries. While more Permian crude will make its way to Cushing, the amount will be limited as pipelines in that direction have already been near capacity.

The Port of Corpus Christi has opened its inner harbor to barges that have a 20-foot draft or less, and is working to resume full operations early next week. However, most ports and terminals along the Texas border, including Houston, Freeport, Beaumont, Nederland and Port Arthur remain closed.

Overall, we currently estimate about 900,000 b/d of U.S. crude production remains impacted by the storm.