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The question now is how quickly can this refining capacity be brought back online, and this in turn will depend on the degree of flood damage to the refineries themselves.

The outlook for crude oil has been complicated by the devastation caused by Hurricane Harvey and the ensuing flood damage. A quick look at the oil charts for the period showed relatively little day-to-day movement for Brent which has been effectively range-bound since the beginning of August. The front-month Brent contract closed out last month pretty much where it ended in July and has done little since. In contrast, WTI fell over $4 in August for a loss of around 8%.

Of course, it’s a feature of the oil market that there are many different types of crude traded around the world. Brent and WTI are the two main exchange traded contracts with the most speculative interest. The Brent Blend is a combination of crude from a number of oil fields in the North Sea and is the main benchmark for crude oils in Europe and Africa. WTI (West Texas Intermediate) is the main benchmark for North American crude, those oils which are extracted from the US then sent and stored to hubs such as Cushing, Oklahoma. It is of course WTI which has been affected by the terrific flooding of Texas and Louisiana. The storms which swept across the Gulf Coast led to the loss of around 20% of US refining capacity. This saw gasoline prices spike higher, but it also meant that there was a drop-off in crude demand as refiners were unable to process fresh supplies.

The question now is how quickly can this refining capacity be brought back online, and this in turn will depend on the degree of flood damage to the refineries themselves. This could be anything between a couple of weeks to maybe two months.  While we’re already seeing the gradual restart of some refineries in the Gulf, and a modest pick-up in WTI as a result, difficulties remain. Motiva, the US’s largest oil refinery remains closed and sources believe it could take another fortnight before it can fully reopen.

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Chart courtesy of Investing.com

But there are other questions over US supply, and that’s before traders return to considering the success (or otherwise) of self-imposed output cuts from OPEC and non-OPEC producers in supporting prices. US shale production has picked up sharply over the past twelve months. At the beginning of the summer the Energy Information Administration (EIA) was predicting that the US will be producing around 10 million barrels per day (bpd) by year-end. This would represent a tremendous increase from the 8.9 million bpd drilled in 2016 and would easily surpass the country’s 1970s record of 9.6 million bpd. However, the latest EIA data suggests that the agency may have been too bullish in its outlook for US output. The EIA’s monthly report, while delayed, provides a more accurate insight into US production than the weekly figures. The most recent comparisons suggest that the EIA may have been overestimating US production by around 200,000 bpd. If so, then output may be closer to 9 million bpd than 10 million by year-end. This in itself could support oil prices for the rest of this year.

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Posted by David Morrison

Category: PM Bulletin


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