Crude Oil, Natural Gas, Refining and Chemical Sector Impacts
IHS Markit, a provider of critical information, analytics and solutions, is releasing periodic updates on the impact of Tropical Storm Harvey on the crude oil, refining and chemical sectors.
A summary of the latest update (as of end of day Thursday, August 31) follows below.
- Harvey-related logistical disruptions (especially to pipelines and ports) and refinery outages remain the most important factor impacting the local crude market.
- International crude prices have been mostly range-bound since the storm (although Brent is up by a sharper $1.40 as of Thursday afternoon).
- The widening of the Brent versus WTI Cushing price spread to nearly $6 per barrel (up from $3.50 before the storm) is an indication that crude prices in the inland shale producing regions of the US are under downward pressure because of the logistical constraints cause by Harvey.
- As of Thursday, US Gulf of Mexico operators have shut down approximately 236,000 b/d of crude oil output, equal to around 13 percent of total Gulf of Mexico production. In addition, about 0.57 Bcf/d of natural gas output was shut in, or about 18 percent of Gulf production.
- There are no reports of damage to offshore platforms and the shut-ins appear to be mostly related to takeaway constraints, given the large volume of refining capacity that remains offline. The key limitation for producers remains takeaway capacity, given that most of Houston-area refineries are still offline or at reduced capacity.
- The Texas Railroad Commission is estimating that as much as 500,000 b/d of onshore Eagle Ford shale production (about a third of the play’s output) was shut-in in response to the storm. However, a relatively quick recovery is now expected.
- Resumption of normal activity levels at the port of Corpus Christi by next week should be a positive in terms of returning Eagle Ford wells to production. It should also facilitate resumed exports of US crude oil. US crude exports have averaged over 900,000 b/d year-to-date, and are almost entirely sourced out of the Gulf, with Corpus Christi handling about 250,000 b/d.
- There have been no reports yet of a slowdown in Permian crude oil production, although crude storage in the field could become a limiting factor for operators if key pipelines to the Houston-area remain shut.
- The US Department of Energy is preparing to release up to 1 million barrels from the Strategic Petroleum Reserve to supply the Phillips 66 refinery at Lake Charles on an emergency basis. That refinery and the Citgo plant (the other major Lake Charles refinery) are partially supplied by pipelines that deliver light crude oil from Texas. Two of the pipelines that deliver crude from Texas to Louisiana refineries (Bayou Bridge Pipeline and Zydeco Pipeline) are reportedly down.
- Hurricane Harvey thus represents by far the greatest ever disruption to US refining capacity.
- Approximately 3.6 million b/d of refining capacity (better than 20% of the US total) is still offline, with a further 1.8 million b/d (approximately 10%) operating at reduced rates or otherwise affected.
- The impact to supply is even greater if the more self-contained western regions of the country are excluded; specifically, nearly 38% of US capacity east of the Rockies has been disrupted by Harvey.
- Given that some refineries have now been offline for a nearly a week, the effects of this disruption are beginning to propagate further downstream, with outbound pipelines (including the 2.6 million b/d Colonial system) unable to source product from the Houston area and fuel prices surging throughout the country.
- The NYMEX RBOB spot price breached the $2.00/gallon mark during after-hours trading and, as of noon Thursday, had reached $2.15/gallon. Including today’s gains, this key benchmark has now increased by 57 cents (around 36%) over the past ten days and it would not be surprising to see it rise further.
- Wholesale and retail gasoline prices have already increased slightly, but will continue to rise as the impact of the spot price surge ripples down the value chain. The scale of these price increases will be most severe in the Gulf Coast, the Southeast, and the Mid-Atlantic, but such is the importance of the Texas refining industry that the entire country will be affected.
- In the natural gas market, demand reductions from both Hurricane Harvey and a broader cooling trend have more than offset the reductions in supply associated with the hurricane, with the result that prices have hardly moved.
- According to OPIS/PointLogic daily tracking data, modeled wellhead natural gas production in the US Lower 48 was reduced by approximately 1.9 Bcf per day during the hurricane period August 25-28, in comparison to the prior 4 days August 20-23 (Gulf of Mexico production began to decline August 24 as platforms were evacuated, so that day was affected by the hurricane). This impact was roughly evenly split between the state of Texas and the Gulf of Mexico.
- The maximum daily production loss was on August 26, when the decline measured approximately 2.5% of US production, or 2.02 Bcf per day.
- By contrast, power demand fell by approximately 7.6 Bcf per day in the US over the same period, with Texas contributing approximately 1.3 Bcf per day to that total reduction.
- With an additional contribution from a reduction in residential and commercial demand, total US natural gas demand fell by approximately 8.2 Bcf per day from August 20-23 to August 25-28. This reduction occurred as overall cooling degree days in the continental US declined from 11 to 7 over the continental US according to the NOAA.
- Hurricane Harvey, and both its contribution to cooler weather and a broader cooling trend, have taken much more demand out of the natural gas market than supply.
Natural Gas Liquids (NGLs)
- Based on company reports, IHS estimates about 45% of the total NGL fractionation capacity was potentially impacted because of Hurricane Harvey.
- NGL operations at Mont Belvieu, Texas remain constrained due to Hurricane Harvey. As of August 28, four of the eight Enterprise Products Partners fractionators at Mont Belvieu, Texas were operating.
- Targa’s 493,000 b/d Cedar Bayou Fractionators (CBF) in Mont Belvieu, Texas were taken out of service on August 29. Targa also reported flooding of their brine disposal pumps at their Mont Belvieu terminal, which also affected facility’s ability to receive NGL and may lead to additional supply disruptions in the near future.
- Oneok’s fractionation capacity was partially impacted and operating at reduced volumes primarily due to temporary outages and restraints from refinery and petrochemical customers.
- Other major operators like Energy Transfer Partners (ETP), parent company of Lone Star NGL, stated minimal impact on their operations at Mont Belvieu.
- Since Mont Belvieu is a major fractionation hub, impact on operations at Mont Belvieu also rippled through several upstream gas processing facilities due to reduced fractionation capacity availability.
- DCP Midstream’s five gas processing plants in Eastern portion of Permian Basin in Texas were shut down due to Hurricane Harvey related NGL transportation issues to the Gulf Coast. The total capacity of these gas plants is 160 MMcf/d. The plants will restart as soon as the fractionation capacity at Mont Belvieu, Texas or Sweeny, Texas becomes available.
- A total of 845 MMcf/d of DCP’s gas processing capacity in South Central Texas has been offline since August 25, and they are preparing to restart one of its 200 MMcf/d plant at reduced volumes.
- Enterprise’s six of eight natural gas processing plants were impacted. Their largest facility at Yoakum was operational.
- Exports terminals were also affected by Hurricane Harvey and almost all waterborne NGL exports were brought to a halt. Phillips 66 temporarily suspended operations on 25 August according to a notice on the company’s website, owing to the port of Freeport’s closure. IHS JOC states that, “Port Freeport’s channel lost five to seven feed of draft, according to the local pilots’ association. Maintenance dredging will be required to restore the channel to its 45-foot depth.” The company also added that its “other assets in the Gulf Coast region continue to operate while implementing their hurricane preparation plans.”
- Operations at Enterprise’s Morgan’s Point terminal have been affected by the storm. The ethane terminal, capable of 200,000 b/d of exports, was put out of service.
- Targa’s Galena Park Marine Terminal is not in service because the Houston Ship Channel has been closed to ship traffic since 25 August.
- Exports have been curtailed due to marine terminal shutdowns. According to preliminary data from the IHS Waterborne LPG Report, Hurricane Harvey has forced nearly 3.4 MMbbls off of the August export roster for the USGC, or the equivalent 6 VLGC liftings. If the barrels that are no longer leaving the USGC in August follow the same distribution of destinations as the liftings ytd, then 37%, 1.25 MMbbls or about two VLGC cargoes, will not flow to the Far East that otherwise would have.
- At the same time, Harvey has taken just over 1.5 MMbbls of ethane exports off the Morgan’s Point export program for August, the equivalent of just under two VLEC cargoes. If the ethane cargoes followed the same distribution of destinations as the ytd liftings from MP, then 72% (just over 1 MMbbls) would have otherwise gone to India, with the balance destined for Northwest Europe.
- Expectations for total LPG exports for the month of August have been reduced by slightly more than 140,000 b/d from 930,000 b/d prior to the storm to now at 790,000 b/d.
- Ethane export expectations for the month of August have been reduced from approximately 150,000 b/d to 97,000 b/d.
- NGL prices rose sharply globally after Hurricane Harvey made landfall as the market feared the impact on US fractionation and export capacity. After the Hurricane, concern within the NGL trading community around supply and inventory constraints quickly drove up the ratio of propane to crude from 66% on August 23 to 71% on August 30. As the market evaluates the impact on already low days of supply, the ratio may spike much higher as we approach the winter heating season.
- Ethylene – The amount of confirmed outages has increased, pushing the percentage of total US ethylene production offline to over 50% and total US ethylene consumption capacity to 32%. As of the time of this writing, no ethylene production units have been confirmed to be offline in Louisiana, although unconfirmed reports point to supply chain constraints and storage issues. Units are expected to begin restart procedures as soon as the storm passes, hopefully by week’s end. However, it may take weeks for the overall ethylene market to approach pre-Hurricane production levels.
- Propylene – The amount of confirmed propylene production assets offline has increased to 40% of the PGP/CGP and 28% of the RGP supply. Another 2% of PGP/CGP supply and 1% RGP supply is suspected down as well. Feedstocks to crackers and PDH may be compromised or limited which may curtail operational capability. Additionally, many of the derivative products are distributed by rail and marine and, as such, logistics have and will continue to be problematic. Derivative consumption of propylene has now reached 43% or relative parity to supply.
- Polyethylene – Logistical constraints associated with trucks, rail, and ocean freight may be a more significant issue than actual damage to the physical plant sites and their respective production capacity. In anticipation of supply disruptions some major PE processors have already begun advising their customers to expect reduced shipments due to the referenced logistical constraints and as such the public could begin to see shortages develop in the next few weeks.
- Polypropylene – Several polypropylene (PP) producers are expecting to have units back in production by early next week. At this time not a single plant is believed to have undergone significant damage which means that constraints to production are a result of either propylene monomer supply or critical, ancillary issues such as rail car and worker availability.
- Benzene – Spot benzene prices continue to be volatile with prices surging higher with the announcement of additional supply outages and a Benzene Force Majeure (FM). The market balances however continue to quickly shift as some ports are preparing to reopen. A benzene FM from Tuesday night spurred some spot activity as participants were looking to cover their positions. However, this first Force Majeure could be short lived as the Freeport, Houston and Texas City ports are expected to slowly open today allowing some access to marine feedstock supply and product take away.
- Toluene – Toluene prices continue to be pushed higher by gasoline. The reformate prices have surged to $2.35 per gallon and the IHS average blend values have topped $2.40 per gallon. The toluene price has firmed but not as quickly as gasoline. Chemical demand is hampered by derivative units also being taken offline, namely STDP and TDI units due to the storm. Solvent distribution has also ground to a halt. Product will begin to move again by the weekend but all logistics will be slowed.
- Mixed Xylenes – Mixed xylenes prices are spiking along with gasoline prices. The blend values are now over $2.40 per gallon but that could prove to be a short term surge as prompt gasoline prices are driving the increase. On-spec mixed xylenes from Lake Charles could be in the spot market by next week and imports are thought to be loading from the EU to the U.S. right now. That will start to soften the mixed xylenes price as demand has also been tempered by PX units down in Baytown and Corpus Christi and a planned turnaround in Decatur expected to start in 10 days.
- Para-xylene – The outlook for PX production at Texas City swung dramatically when Marathon decided to shut down refinery operations on Tuesday but quickly reversed course on Wednesday as the port was preparing to reopen. PX rates are reduced and are running on feedstock in inventory as is the refinery. The PX production in Corpus and Baytown continue to be impacted by the storm which is expected to lead to a multi-week loss in production.
- Chlor Alkali/Vinyls – As of Thursday August 31, 25% of US PVC capacity remains offline due to the storm. The duration of the supply interruptions remains uncertain. OxyVinyls issued a Force Majeure declaration notice today on supply of PVC. With 43% of the US ethylene capacity currently out of service, ethylene availability via pipeline to Louisiana vinyls facilities could become an issue.
- Methanol – At least one Texas based methanol unit has been confirmed shutdown by loss of power. Another two units are understood from market sources to have been shutdown due to a lack of logistics to move methanol or its derivatives out of the area. The storm has moved east and is not expected to impact production at the Beaumont facility due to the plant’s elevation and the weakening strength of the storm. Spot methanol market activity has resumed for September with prices elevated by around $26 per metric ton (an 8.6% increase) over where they were prior to the storm.