Dunkirk in Houston

August 30, 2017 08:10 AM
Daily Energy Market Analysis

Watching the widespread devastations in Houston from Hurricane Harvey has been gut wrenching, and now that this storm has regenerated and made a second landfall in Louisiana, just west of the town of Cameron; and its impact on lives and property is just starting to be measured. Ordinary citizens in Houston have been heroically rescuing their neighbors with their own boats, and it reminds me of the beach rescue in Dunkirk when citizens, with their boats, saved the British army and changed the course of history. Despite the challenges and devastation in Houston and the pain, this will prove to be their finest hours.

The impact on energy and the economy is also just beginning to be felt as the fall out from the storm damage is just beginning to be measured. Right now, the market focus is the impact on U.S. refineries and the shutting down of transportation pipelines. Yet they will also have to deal with the very real possibility of considerable damage to oil and natural gas producing infrastructure as well as damage caused to Eagle Ford Shale fields.

RBOB gasoline futures are on the rise for the seventh day in a row as it has been confirmed that the Colonial Pipeline is running at reduced rates, raising the real possibility of gas and diesel and even jet fuel shortages. Colonial Pipeline Co. said Tropical Storm Harvey affected its Houston origin, which includes Pasadena, Houston, and Cedar Bayou. Service from those locations was interrupted during the storm and its aftermath, although the company is working to restore service and minimize the impact. Still, reports that flow was down by as much as 60% is feeding into that gas and diesel rally.

The Wall Street Journal reports that the, ”Colonial is the biggest fuel pipeline in the United States, stretching 5,500 miles through 12 states. Analysts have likened it to “a Mississippi River of fuel.” It can transport up to 2.5 million barrels a day of gasoline, diesel and jet fuel, and is directly connected to several airports, including Nashville, Charlotte and Dulles International Airport in Washington, D.C. The pipeline, which was built in 1963, is a main source of fuel for the Southeast, including offshoots to parts of northern Florida. It ends in New Jersey and is also a massive supplier of fuel to the greater New York City metro area.

The Wall Street Journal also reported that the nation’s largest refinery in Port Arthur, Texas, curbed fuel output to 40% Tuesday due to severe weather. That 600,000-barrel-a-day plant was taking on water in some areas, its primary problem wasn’t getting all the oil it needed to make fuel because of port and pipeline closures, according to its owner, the Saudi Arabian Oil Company.

Other refineries are shut, not due to damage, but because they cannot get crude. Bloomberg News reports that Marathon Petroleum Corp.’s Galveston Bay refinery in Texas City, with a capacity of 451,000 barrels a day, may be forced to halt production within several days because it is running out of crude, a person familiar with operations said on Monday. Its oil comes via Magellan Midstream Partners LP, which suspended use of its pipeline in the area on Sunday. That pipeline is one reason gas prices in the Midwest are already spiking.

Shale oil producers can’t mover crude but there are also issues as to whether they can raise production to previous levels in the Eagle Ford after the storm may have changed the liquid make up of some of the reservoirs.

The Wall Street Journal reports, "The storm’s widespread devastation has come into focus, several analysts say that much, if not most, of the 1.4 million barrels of oil produced daily in the Eagle Ford shale of South Texas has been cut off and may not return for weeks. The Eagle Ford, which is on the doorstep of Corpus Christi where the storm made landfall, is second in output in the state only to the Permian Basin of West Texas. The shipping traffic in Houston, Corpus Christi and other ports may not be fully restored for two weeks. That and other infrastructure limitations will have a domino effect back to production, said Tony Sanchez III, chief executive of Eagle Ford operator Sanchez Energy Corp. Restarting wells may not guarantee that they resume flowing at the same rate, he said."

On a technical level, he fears that shale wells, once shut off, could lose pressure. Most of his company’s production wasn’t shut in as it lies in areas west of the storm’s path. “It’s not just a matter of flipping a switch,” he said. “There is significant risk in those wells not coming back to previous levels.” The Journal says that the market may be underestimating Harvey’s impact because nothing like this flood has ever happened to the shale industry before, said Giovanni Satnav, a commodities analyst at UBS Wealth Management.

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About the Author

Phil Flynn is a senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. Phil is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets.