The Week Ahead: Harvey – A Bearish Hurricane

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All eyes are on the impact of Hurricane Harvey right now. Our hearts and prayers go out to the entire community affected by this disaster.

CRUDE OIL

  • US Crude & Refined Products
    • Tropical Storm Harvey which initially hit Texas Gulf Coast late Friday as a Category 4 hurricane (now downgraded to a tropical storm) has hit the heart of energy sector hard, the effects so far are drastic and things could get much worse before they get better. Harvey, which is the most powerful hurricane to hit Texas in more than 50 years has already changed the dynamics of the energy industry in the US. At least 10 refineries in Houston and Corpus Christi areas (including Exxon’s Baytwon refinery, 2nd largest in nation) have been shut down knocking down roughly 2.2 MMBbl/d of refining capacity, which led to gasoline futures to spike. Future prices for gasoline are at their highest levels since July 2015.
    • Harvey has also had a significant impact on crude supply with current gulf of Mexico output down nearly 379 MBbl/d (21.6% of current output) and onshore production down approximately 300 MBbl/d, as estimated by the Interior Department’s Bureau of Safety and Environmental Enforcement. This number will likely increase as producers assess the impact of the storm and full reports come in, particularly in the Eagle Ford area where many producers had already started idling production. Although crude production is down significantly, the impact is more than offset by the decline in refining capacity due to refinery. Although the effects of tropical storms are usually short-lived, it is currently unclear how soon the refineries and production can come back online. The market is anticipating any news of long-term damage to refining or production infrastructure.
  • Global Crude
    • In addition to the impact of Harvey to US crude oil supply, three Libyan oilfields have been shut down including the biggest one, Sharara. Libya is currently producing approximately 300 MBbl/d less two than weeks ago. Under normal circumstances, this would have caused an increase in prices, however, the impact of Harvey to the demand side more than offset this supply loss.
  • Prices
    • Prices have been under pressure with news of OPEC compliance falling in July from the June levels. US production growth trajectory has continued even though near-term prices remain below $40. Libya has been working on reopening their largest oil field, Sharara, which remains offline due to a pipeline blockade. The possibility of reopening Sharara field, as well as Libya increasing production further and bringing more crude online will put additional downward pressure on prices and keep a lid on prices moving forward. While price volatility is expected to continue in the short term, OPEC recently announced that the fate of the current agreement would be discussed in their November meeting. Kuwaits’s oil minister Essa al-Marzouq mentioned that a decision would be made either to extend or terminate the production cuts in November OPEC meeting.

NATURAL GAS

Historically, hurricanes have been bullish for natural gas prices because of the production impact in the Gulf of Mexico. However, following the unconventional revolution and growth of onshore production, the impact of a major hurricane to prices has changed. The NYMEX (Sept contract) traded as high as $3.00 per MMBtu on Aug 22 and even a hurricane could not prevent a price drop; the contract closed at $2.89 on Friday. Sept also opened lower on Monday morning, although it has since rebounded and is up $0.02 as of this writing.

In addition to much of US natural gas supply now being located onshore and not at risk from a hurricane, demand losses along the Gulf Coast now more than mitigate any supply disruption.

Below is a summary of Harvey’s impact to supply and demand fundamentals based on PointLogic’s flow data and DI analysis:

  1. Natural gas production is down almost 2.0 Bcf/d in the past 4 days (Aug 25-28) compared to previous 30-day average. Losses are split between the Gulf of Mexico (Offshore, 0.9 Bcf/d) and TX onshore (0.9) and LA onshore (0.1).
  2. On the demand side, power burn in the US is down 6 Bcf/d (~17%) during the same timeframe due to cooler temperatures and outages, including a 30% decline in Texas where utilities reported outages impacting more than 336,000 customers during the outage peak on Saturday afternoon.
  3. Mexican Exports are down 0.3 Bcf/d from 4.3 to 4.0 Bcf/d.
  4. LNG – no impact. Volumes since Friday are up 0.26 Bcf/d from 1.9 Bcf/d in the previous 30-day average to 2.18 Bcf/d. Cheniere Energy reported no impact from Harvey to its Sabine Pass facility in Louisiana and “minor cosmetic” at its facility in Corpus Christy that is currently under construction.

Harvey has proven that the natural gas market is now in a supply abundant era and demand will determine the direction of natural gas prices. Drillinginfo expects natural gas prices to remain depressed while Harvey continues to limit demand for power.

NGLs

  • Severe weather and flooding has caused operations in Houston to come to a halt. Export facilities and steam crackers have been shut down due to Hurricane Harvey; disrupting NGL demand.
    • Export facilities affected:
      • P66’s Freeport Terminal – 150 Mb/d
    • Processing facilities affected:
      • Enterprise Shoup Gas Processing Plant and Fractionator – 50 Mb/d
      • Flint Hills Resources Dehydrogenation plant in Houston – 26Mb/d
      • Javelina Gas Processing Plant and Fractionator – 29 Mb/d
  • Not only is Hurricane Harvey shutting down operations directly related to NGLs, it is also hitting the downstream market at petrochemical plants as well. DI is estimating about 10-15 petchem plants that have shut down operations due to the severe weather.
  • Along the same trend as crude and natural gas, less demand for NGLs is putting downward pressure on prices. Prices are expected to continue to drop over the next few days until the storm subsides and demand facilities are brought back online.
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