It's complicated, and I'm pretty sure that the market's knee-jerk reaction was at least partly wrong.Flowerp wrote: ↑Aug 29th, 2017 12:53 amWith the disruption that Harvey is causing to the refineries in the Houston, I would have thought that pipelines (or in general oil) should go up due to disruption in supply. I would like to understand the reason why is it working in the exact opposite manner?
About 2.2 million bpd of refining capacity in the US is shut-in at present. This number may grow, as Harvey is forecast to hit refineries again, but it also may shrink, as the 850,000 bpd in Corpus Christi starts coming back online.
Also, at its peak 450,000 bpd of offshore crude was disrupted, although this was down to a little more than 300,000 bpd offline by Monday afternoon. I have no idea how much of Eagle Ford shale is disrupted, although I would guess a lot. I've read estimates from 300,000 bpd to 1.1 million bpd offline out of 1.3 million bpd Eagle Ford produced before this started. The high estimate does not seem credible to me, as only about half of Eagle Ford (and less of its oil rigs) were within the radius of the tropical storm. Some of this is also coming back online (for example, Baytex announced on Monday it was restarting some production, as did EOG, though we don't know exactly how long it will take them to ramp back up).
Transportation is also an issue, as Texas imports almost 2 million bpd of crude, exports hundreds of thousands of bpds of crude, and exports millions of bpd of refined products by water (this is all closed down right now, and may operate at reduced capacity if ports are damaged). There are also a lot of pipelines closed down, one of which links 650,000 bpd of crude from the Permian to the refineries in Texas.
For gasoline, this is bullish, and we've seen that in the activity of the market. For WTI, this is probably short-term bearish, as refinery outages in the US significantly outweigh production outages at the moment, and the path of the storm looks like it might cause more refinery outages, while it no longer threatens Eagle Ford with further damage. For WCS, I'd guess it's short-term bearish as well. Canada does send hundreds of thousands of bpd to Gulf refineries, and both of the big refineries down in the Houston area process sour crude (which is what the oil sands produce) but the effect is only likely to be material if there's long-term damage to the refineries (which might be the case). Moreover, as Canada only exports to the US, a possible short-term glut in American oil caused by refinery/pipeline outages should pressure WCS.
What's confusing is the price action of Brent crude. Past hurricanes have reduced demand in the month following by 200-300,000 bpd, but crude production outages are on he order of 600,000-1.5 million bpd + Libya (which has another 350,000 bpd disrupted at present). Moreover, the US is already seeking Asian and European gasoline, distillates and airplane fuel cargoes to make up for their shortfall, so one would expect that Brent should have risen due to rising non-US refinery demand, not fallen. I'm really not sure what's going on here.
In the long-run, as oil is an international market, I would expect that this will be a mildly bullish event for global crude oil markets, although maybe not for Canadian oil if too much sour crude refining is shut-in. Shale margins in the Permian will be pressured for a while, which is bullish, much of Eagle Ford is currently flooded, which is bullish, Gulf production will not return immediately, which is bullish, and having to transport oil farther to refine it (if refineries are shut in) is also slightly bullish. Set against that, is the unknown reduction in short-term demand (I say short-term, since demand rebounds during rebuilding) over the next month or two, although we can estimate it (as I did above) from past major hurricanes in the area.