The skies are clearing over Houston, but the damage from the remaining elements of Hurricane Harvey has spread east to Port Arthur and Lake Charles along the Texas-Louisiana border. That has knocked more refineries offline, including the largest refinery in the United States.
In the aftermath of the storm, the most serious threat to the energy industry is the extended outage of refineries and pipelines, according to Goldman Sachs. The problem actually looks worse than it did earlier this week as the deluge has shifted towards Port Arthur, another refining hub. Motiva, which runs the U.S.’ largest refinery in Port Arthur, began to completely shut down its 600,000 bpd facility on Wednesday.
Goldman says the refinery shut downs, as of August 30, have spiked to 3.9 million barrels per day (mb/d), although upstream oil production outages have dropped below 1 mb/d. More ports are now closed – in addition to Corpus Christi and Houston, the ports of Lake Charles, Beaumont, and Port Arthur have shut down.
These outages, the investment bank says, will mean that the “ongoing recovery in production will only be partial.” The refinery and pipeline closures are “leaving the oil market long 1.9 mb/d of crude vs. last Thursday, short 1.1 mb/d for gasoline and 0.8 mb/d for distillate.”
More worrying is that the recovery might not be quick. While most refineries had controlled shut downs, there are quite a few, especially in the Port Arthur region, that have been inundated with water, which means that the damage to them is still unknown. Based on the past major hurricanes of Rita and Katrina, Goldman speculates that about 10 percent of the 4 mb/d of refining capacity that has been disrupted will remain offline for several months.
Other analysts agree that the damage could result in lengthier outages than many had hoped. “I’m actually quite concerned about Beaumont-Port Arthur because they just got a huge amount of rain in 24 hours, and we’ve already seen flooding within the refineries themselves, so we don’t know exactly how bad it’s going to be,” Andy Lipow, president of Lipow Oil Associates, told CNBC. “If it is bad, you’re looking at six to eight weeks of outages over in Beaumont-Port Arthur.”
Ultimately, that could mean that upstream oil producers will be unable to return to full production. Damage to pipelines, storage and processing facilities will also inhibit a full recovery. “It will be a while before operations can return to normal and the U.S. refining industry is bracing itself for an extended shutdown,” Stephen Brennock of PVM wrote in a research note.
The prospect of lasting damage to the energy industry is sinking in. “Back to normal is months, not weeks, for exports and for the industry and the region. We have to acknowledge that,” Barclays analyst Michael Cohen wrote.
While much of the focus is (rightly) centered on the effect on gasoline supply, the refinery outages could eat into crude oil demand for quite some time. In fact, on balance, Goldman says that the supply outages could be outweighed by the destruction of demand. Houston alone accounts for around 750,000 bpd of oil demand. Goldman Sachs estimates the region will see demand fall by about 0.7 mb/d in the first month after the storm.
That will make “it harder for OPEC to rebalance the market and maintain bullish sentiment,” Barclays’ analysts said. OPEC has been struggling to drain inventories for almost a year, but without a substantial portion of U.S. refineries online, inland crude oil storage facilities in the U.S. could fill up once again. And the dip in demand could mean OPEC’s time horizon for balancing gets pushed out a bit more into the future, just as the cartel was hinting that it might have to extend its production cuts anyway.
But the problem is more complex because U.S. data will be much “noisier and less useful as a high frequency indicator at the very time OPEC needs it most,” Barclays says. Storage might increase, refinery runs will bounce around, production figures will edge up slowly – in short, the trend lines that the market has become accustomed to will be all out of whack. And because the U.S. offers the most transparent data, closest to real-time as one can get, it has an outsized impact on market psychology. The data will be really messy for weeks to come, which will complicate OPEC’s strategy.