The True Edge
A Navarik Market Update
We are now perhaps at peak shutdown due to Hurricane Harvey. This is because the storm has moved on to the Lake Charles area, but refineries in the Houston area are still taking stock of the damage even if the centre of the storm has moved on. Now is perhaps a good time to estimate market effects. The damage is likely to be temporary for a majority of the affected refineries. ExxonMobil’s double hit to their Port Arthur and Baytown refineries aside, most damage is expected to be functional delays due to high water levels rather than structural damage due to wind or storm surge. This is not to say that floodwaters do not cause damage; merely that it is likely to be more advantageous for downstream customers to raise prices and wait out until the affected refineries are fully repaired, rather than source alternative supplies for the sake of keeping the price level where it is. Total, for instance, expects the water to have receded from their Port Arthur facility by the weekend, and most Corpus Christi facilities are tentatively scheduled to restart. Prices increases could moderate the imbalance without the need to source alternative supplies.
This may come as consolation to some in the industry, but is likely to hit consumers hard, particularly in Florida and the Eastern Seaboard. PADD 2 (the US Midwest) has ample refining capacity that – amazingly – ran at 101.7% utilization last week. Northeastern refineries are also running at historic highs, but is such a large consumption region that it will not be able to meet its own demands. Florida, meanwhile, has no refining capacity and yet a large population. Retailers there will have to compete with the Northeast for local production or increased European imports to fill the gap, but this will only encourage increased overland shipments from PADD 2 into PADD 1 and a corresponding price increase in PADD 2.
However, be warned that this might not become situation normal. A significant factor in many PADD 3 refiner shutdown decisions was lack of access to crude supplies and feedstocks rather than damage. Once port and pipeline damage (particularly that of the Colonial Pipeline Company) is assessed, we will have a clearly picture of whether or not those minimally damaged refineries will be able to ramp production and how the products will able to make it to the pumps. In the midst of a tragedy, it is wrong to speak of winners and losers, so we’ll instead address which companies’ strategic positions are better suited post-Harvey under these conditions.
Nationally disperse dedicated refiners such as P66 and Valero stand to benefit. Margins for non-affected refineries are about to widen. At the very least this margin should be able to cover some of the repairs to their affected facilities, and the longer prices remain high, could indeed go beyond that. Effects for independent downstream retailers are probably going to be neutral; the prices they receive at the pump are going to increase, but their margins are going to be tightened from beneath them since midstream suppliers are going to increase their own prices. This is why perhaps the best placed companies are those that have a midstream and downstream presence - they can compete at the pumps while also controlling the effective prices they charge their retail arms. And as for upstream E&P actors, their fate is simply uncertain. Gulf of Mexico offshore production appears to have fared relatively well and inland shale producers appear to have made it out okay, but until it becomes apparent how well the PADD 3 refinery fleet survived the flood and how customer habits have changed, we have no clear frame of reference for the off-take capacity of their product. If Gulf Coast refiners aren’t able to send out products, expect global oil prices to rise as existing crude stocks are diverted to meet US demand.
Table 1: Harvey-affected refineries and presumed damages
Colin McCann is an Oil & Gas analyst with Navarik Corporation. The Navarik Data Products team analyzes Navarik's proprietary data sets and external sources to provide insights into the oil & gas shipping market. The resulting analysis enables physical and paper traders to see ship movements across the barrel before anyone else in the market.
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