IHS Markit Hurricane update (September 13, 2017)

Crude Oil, Refining, US Fuels Markets, NGLs and Chemical Sector Impacts

IHS Markit (Nasdaq: INFO), 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 follows below (As of end of day September 12, 2017).

Refining

  • IHS Markit estimates that 13 of the 20 affected refineries are at or near normal operating rates. Five of the other seven are actively in the process of restarting or ramping up runs.
  • The amount of capacity offline is still significant. Including the impact of refineries that are partially operational, IHS Markit estimates that around 1.7 million b/d of distillation capacity (9% of US total) is offline as of September 12. This is down from around 4.8 million b/d (27% of US total) at the peak of the flooding.
  • Because of the amount of refining capacity that remains offline (and perhaps Irma-related market jitters), gasoline prices have been slow to decline. It has now been nearly two weeks since the peak of Gulf Coast flooding and the NYMEX RBOB spot price remains about 20% above its pre-Harvey levels.
  • Looking forward, gasoline prices may decline sharply in the coming week due to the arrival of European product cargoes and Hurricane Irma affecting demand.

US Fuels Markets

  • Without another hurricane threat to US refining, we are now past peak with US gasoline prices.
  • The largest declines are likely to come in the states that saw the greatest late August/early September spikes. East of the Mississippi markets look to see drops of perhaps 5-10cts gal per week. The declines are probably set to begin in earnest with the first day of autumn.
  • Sub-$50 bbl crude oil prices would under ordinary circumstances equate to street prices in the $2.25 gal neighborhood or lower. Gasoline fetches much more than crude at the moment on worries that at least 1-million b/d of Gulf Coast refining may be down (post-Harvey) until October.
  • In August, we saw at least one week where gasoline demand was measured at more than 9.8-million barrels per day. Don’t be surprised to see one of the upcoming September weeks with demand about 1-million b/d lower. Part of this is post-Hurricane demand destruction, but part of it is the lumpiness that tends to lift driving season demand and depress demand during normal weeks.
  • Florida terminals are being resupplied as we speak. Marathon’s facilities appear to be open throughout the state and that company has the most extensive network of logistics in the Sunshine state. Cargoes from Europe took alternate routes to the East Coast but should soon arrive and Louisiana-sourced material delayed for 5-7 days is en route to Florida. The problem may come via lack of ethanol – at least two unit trains did not make the usual trip from Midwest to Florida locations.

Logistics

  • Major Gulf coast ports have all re-opened although on an individual basis there may be Coast Guard mandated restrictions that are still being enforced.
  • The three major Class I railroads in the area – Union Pacific Railroad, BNSF Railway and Kansas City Southern Railway -- have effectively restored service on their networks, but delays linger. By Sept. 9, Union Pacific Railroad had reduced the number of miles out of service from 1,750 at the peak of disruption to 50 miles. KCS and BNSF said their Houston area subdivisions were all operational. However, service delays are expected thanks to a backlog of freight and reduced train speed limits due to repair work.
  • Freight demand is returning to Houston, as immediate emergency relief gives way to longer-term rebuilding needs. That’s putting more pressure on already rising truck rates.
  • The impact is being felt nationwide. For the week ending Sept. 2, the US average dry van spot market rate posted by DAT Solutions, a load board operator, rose 12 cents to $1.90 a mile. In Dallas, outbound spot truck rates rose 26 cents per mile. On the Dallas-to-Houston lane, however, spot rates were jolted upward by $1.60 per mile.
  • Higher transportation costs are in the forecast for any chemical or refined product companies utilizing truck as well as rail transport for several months.

Crude

  • A persistently wide Brent-WTI price spread is the most telling signal that US crude oil markets need more time to return to normal in the wake of Hurricane Harvey. The price differential, about $3 per barrel before the storm, is now over $6, a sign that US crude oil supplies are increasing surplus relative to the international market.
  • That surplus has emerged as a still significant chunk of Gulf Coast refining capacity remains offline (although most facilities are recovering). At the same time, port and pipeline closures earlier this month has caused a disruption in US crude oil exports, which dipped to just 150,000 b/d the week ending September 1st (they had been averaging about 900,000 b/d year-to-date).
  • Last week’s EIA report showed a 4.6 million barrel increase in US crude oil stocks, and there are expectations for perhaps an even bigger build in this week’s report.
  • Hurricane Irma appears to have had negligible impact on US crude oil production, although a handful of platforms evacuated personnel in advance of the storm. As Gulf of Mexico and onshore production returns to normal, we expect US overall crude output to surpass its previous 2015 monthly average peak by the end of the year.

Natural Gas Liquids (NGLs)

  • The US Energy Information Administration (EIA) published the first weekly propane/propylene inventory post Hurricane Harvey. US propane and propylene supplies built by 6.3 million barrels over the week ended September 1, according to EIA's Weekly Petroleum Status Report.
  • The build, measured over the course of a reporting week during which Hurricane Harvey decimated large swaths of the US Gulf Coast, far surpassed the average 3.5 million bbl projected by respondents polled in OPIS' survey yesterday.
  • Total inventories now stand at 79.9 million bbl, still some 19.4% below their total from the same week last year. Regionally, Gulf Coast (PADD 3) stocks built 4.5 million bbl, Midwest (PADD 2) stocks 1.4 million bbl, East Coast (PADD 1) stocks 300,000 bbl and stocks in PADDs 4 and 5 200,000 bbl.
  • Compared to previous hurricanes, Harvey was the first which hit the US Gulf Coast after its transformation to being an insignificant exporter in the global market to the largest source of waterborne exports. The US is now responsible for 3% of global waterborne NGL exports and is a major source for Asian residential, commercial, and chemical demand. Thus, it was the first hurricane which effected global LPG prices with the differential between Mont Belvieu and Japanese propane increasing from $65/ton prior to the storm to $90/ton after.

Chemicals

  • Ethylene – The percentage of total US ethylene production offline currently sits at about 10% and total US ethylene consumption capacity in a similar range, with 3 or 4 crackers still idled and at different stages of the startup process. The new ethylene units that were slated to come online over the next 6 months are expected to be delayed by a minimum of 30 days.
  • Propylene – The amount of confirmed propylene production assets offline sharply dropped to 13% of the PGP/CGP with RGP supply offline also lower at 7%. However, nearly 60% of assets are either in restarting activities or reduced. RGP production is also returning with refineries in restarting activities and ramping up. Consumers of propylene (derivatives) have observed a stronger rate of recovery and now seem to be limited by propylene supply. The propylene market forward remains difficult to predict since both producers and consumers are down; however, price pressure will be sharply upward from pre-storm levels based on stronger derivative capability against limited supply as well as higher propane costs.
  • Polyethylene – IHS Markit estimates suggest that approximately 24% of US PE production capacity remains offline as of today while another 30% of US capacity is operating at reduced rates. Alpha olefin supply constraints are also believed to be constraining operating rates as the site associated with approximately half of the US linear alpha olefin production capacity was significantly impaired by the Hurricane and could be offline for several weeks.
  • Polypropylene – IHS Markit estimates that 98% of North American nameplate capacity is now online. Rail cars are shipping out of the gulf coast but there continue to be supply issues in specific cases where applications require specified grades. The market is heavily focused on supply over price this month with a wide range of price premiums for September product.
  • Benzene – Most refineries are in the restart process with each refinery progressing at a different pace depending on the extent of damages suffered during the storm. The restart process can normally take up to two weeks to complete. The Corpus Christi area refineries had about a one-week head start and should be expected to return to normal operations before the Houston and Port Arthur area refineries. The Galveston/Texas City refineries never shutdown and were the first to be back to normal operations. Hurricane Harvey caused the spot benzene price to spike by about $0.12 per gallon to near $2.80 per gallon, but it has since softened to under $2.70 per gallon.
  • Chlor Alkali/Vinyls – Covestro at Baytown is still under force majeure for caustic soda and HCl. Operations at OxyChem are improving and they expect limited impact from the rail industry embargoes. As of today, all PVC producers have announced a 5 cpp price increase. OxyVinyls VCM operations in LaPorte, Texas are back online, while operations in Ingleside, Texas and Deer Park, Texas are ramping up and expected to restart within the next week, fueling expectations of a strong September close.
  • Methanol – Operations are getting back on track with units restarting both up and downstream. Logistics have improved in the ports but remain limited by rail and truck. Spot market activity has waned after a small rush over the last couple of weeks. Prices have plateaued.

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