Traders concerned about possibility that the major storm may move toward Louisiana
Source: WSJ by Stephanie Yang and Alison Sider
Gasoline prices surged Monday after Tropical Storm Harvey knocked out refining operations and traders assessed damage to the Houston area, preparing for a potential shortage in gasoline supply.
Harvey barreled into Texas on Friday as a Category 4 hurricane, the strongest to hit Texas in half a century, but has since been downgraded to a tropical storm. Still, on Monday it looked poised to move back over the Gulf of Mexico before coming back ashore, dumping more heavy rain on Houston and the surrounding area.
Traders remained concerned about the possibility that Harvey may now approach Louisiana and that the onslaught would cause damage to fuel-making plants that could take weeks or even months to fix.
The storm had disrupted nearly 15% of U.S. refinery capacity as of Monday morning, and the number is climbing. Exxon Mobil Corp. reported that its 362,300 barrel-a-day refinery in Beaumont, Texas, is running at reduced rates. The total amount of refining capacity offline could climb to as high as 30% if Harvey moves toward Louisiana, according to Houston energy investment bank Tudor Pickering Holt & Co.
“There are so many things that are left up in the air here,” said Tariq Zahir, managing member of Tyche Capital Advisors, who said the major moves in energy prompted him to start trading at 6 p.m. on Sunday when Asian markets opened and then continue into Monday.
Gasoline futures rose 7.34 cents, or 4.4%, to $1.74 a gallon on the New York Mercantile Exchange. Diesel futures rose 1.77 cents, or 1.1%, to $1.64 a gallon.
Volatility in energy markets had picked up on Thursday as Harvey was upgraded to a hurricane and traders braced for impact. As the storm developed over the weekend, the uncertainty over the lasting damage has added to the frenetic trading.
“I’ve gotten clients calling, [asking] what do we do?” said Mark Waggoner, president of Excel Futures. “I haven’t even had a chance to breathe yet this morning. I don’t even remember the last time it was this busy walking in the door.”
Harvey’s path cut right through the heart of U.S. oil infrastructure, with the Texas coast being home to nearly 30% of the country’s refining capacity. Exxon Mobil reported Monday that a floating roof on a storage tank at its Baytown plant, the second-largest refinery in the country, was damaged during the storm. If plants sustain more significant damage and need to get new electrical equipment and other parts installed to repair damage from flooding, that could extend downtime significantly.
“The market is going to trade from data point to data point,” said Mark Benigno, co-director of energy trading at INTL FCStone. “Are more refineries going to shut in? Will they be shut in for longer? Conversely will they come back sooner? How long will it take ships to get in and out of Houston Ship Channel?”
Even energy industry veterans who have experienced major storms were flummoxed by Harvey.
“There should be a stronger word than unprecedented,” says Tom Kloza of the Oil Price Information Service.
Mr. Kloza said wholesale gasoline prices are rising 5 to 10 cents a gallon throughout the Southeast and other markets that are supplied by Gulf Coast refiners. Consumers will likely end up paying higher prices at the pump as a result.
The reduced refining capacity is also expected to hit U.S. crude demand. On the New York Mercantile Exchange, West Texas Intermediate futures were trading down $1.61, or 3.4%, at $46.26 a barrel. Brent crude, the global oil benchmark, fell 72 cents, or 1.4% to $51.69 a barrel.
Harvey had shut in some 22% of oil production the Gulf of Mexico as of Sunday and caused producers in south Texas at the Eagle Ford shale to curtail output. However, the storm’s effect on demand is expected to be more significant.
“We lost some production, but we lost more crude refinery throughput,” said John Saucer, vice president of research and analysis at Mobius Risk Group. Analysts at Goldman Sachs said they expect that the storm will increase the amount of crude oil available in the U.S. by 1.4 million barrels a day, and the reduced fuel demand could last several months.
As the U.S. has become a larger exporter of oil and fuel, the disruptions to refiners threaten to upend energy markets in other countries as well, analysts said. Latin American countries relying on U.S. gasoline or distillates will have to find alternative sources for their fuel, while Europe could look to the Middle East for additional distillates to compensate for any fall in U.S. exports.
“There could be a real chance for even global tightness in gasoline as a result of this,” said John Kilduff, founding partner at Again Capital.
Meanwhile, traders were already starting to adjust shipments to send more gasoline to the U.S.
“We already heard that some Asian refiners are trying to send gasoline to the U.S., this is in addition to the traditional European supply,” said Ehsan Ul-Haq, a director at energy consultancy Resource Economist Ltd. “I think for a couple of weeks the U.S. will need supplies from all over the world.”