Even though the full extent of the damage caused by Hurricane Harvey across the Gulf Coast is not yet clear, we offer the following initial assessment of the impact of the storm on the US Gulf Coast crude and refining markets. This will be updated as information becomes available. Nearly 900,000 b/d of oil production has been shut-in and roughly 2.2 million b/d of capacity at Texas refineries has been closed. Product prices, particularly for gasoline, have climbed as a result and will remain elevated until refineries return to normal production levels. While it remains unclear for how long refining capacity will remain shuttered, we believe that some refineries, especially in the Houston area could take more than a month to return.

Nearly 900,000 b/d of Oil Production Impacted by Harvey

Offshore producers shut down operations on over 100 platforms and five drilling rigs in anticipation of Harvey. Some offshore facilities out of the storm’s path are working at reduced or full rates until the impact of potential damage at downstream operations is assessed. Currently, about 380,000 b/d of offshore oil production is shut-in, representing about 22 percent of total Gulf of Mexico output. Once the storm has passed and standard checks are made to offshore facilities, operations from undamaged platforms can resume quickly once personnel is in place. Onshore producers are also feeling the impact of prolonged heavy rain and flooding. Several key counties in the Eagle Ford shale basin are under water and both drilling and completion activities have been halted until the storm passes, floodwaters recede, and damage assessments can be made. Over 500,000 b/d of production is likely to be impacted from the South Texas region. Until port and terminals along the Texas Gulf Coast are operational, pipeline movements will be curtailed. Permian Basin activity will slow in response to Houston destinations unable to receive crude. Port closures from Corpus Christi to Houston will also stall both import and export activity. Flooded conditions onshore could take days to clear and flood damage may be extensive, resulting in shut-in production for more than a month. Overall, U.S. crude production is estimated to fall by 800,000 b/d in September. At this point, until we know more about damages and recovery, crude production is estimated to return to August levels of roughly 9.5 million b/d by November.

Major Refinery Disruptions in Houston and Corpus Christi

Currently, over 2 million b/d of capacity at refineries in the Houston and Corpus Christi areas is shut-in. This represents about 40 percent of Texas’ nearly 5 million b/d refining capacity. As a result, product futures have already climbed sharply and will remain elevated until refineries return to normal levels of production. The NYH RBOB spread to Brent has from below $16 at the beginning of last week to over $20 dollars currently. While it remains unclear for how long refineries will be down, judging by preliminary reports of ‘catastrophic’ flooding, we believe that some refineries, especially in the Houston area, may take more than a month to return to normal levels of production. Roughly half of the Houston area’s 2.4 million b/d refining capacity was closed because of the storm, and this figure could rise if the fallout from the storm worsens. Refineries that were shut-down in the Corpus Christi area, which accounted for nearly 1 million b/d of the total idled capacity, are likely to come back online more quickly, possibly within a week or two. One question mark, remains the Port Arthur area and its more than 1.4 million b/d of refining capacity. No refineries are currently closed in this area, but if the storm causes significant flooding, this could change.

Refinery Closures Send Shockwaves Through Product Markets

Closures of Gulf Coast terminals and refining capacity will reduce exports of petroleum products especially to Latin America. As a result, European refiners are likely to increase runs in order not only to send more product Westward across the Atlantic but also make up for a shortfall in diesel imports from the US. At this point we do not expect a drawdown of IEA Strategic Stocks.

As of now, the Colonial Pipeline continues to operate at normal levels. With East Coast imports of gasoline from Europe likely to be unaffected, PADD I product markets will remain relatively well supplied. However, if the Colonial Pipeline continues to run normally, there will be a large draw on USGC product stocks.
Source: ESAI Energy