Refiners on the run

September 19, 2017 09:05 AM
Daily Energy Market Analysis

Oil prices are rising on hopes that Hurricane Jose will not do any damage to East Coast refiners that are running hot and heavy to make up for lost supply from Gulf Coast refiners that were hit hard by Hurricane Harvey. Refiners are already having success with getting gasoline prices to fall but there is more work ahead of them.

My buddies at Gas Buddy says that the average price of gas has fallen in 45 of the nation's fifty states with the national average declining nearly 5 cents per gallon to $2.60 in the first weekly drop since Hurricane Harvey's damage that caused refinery shutdowns weeks ago. Many refiners have put off seasonal maintenance to take advantage of strong margins which for gasoline are at a two-year high, but also because many of the refiners not impacted by Hurricane Harvey have sent workers down to help those refineries get back up and running. With strong demand both domestically and internationally, we should see oil try once again to break out of the upper band that has held them back for most of the year.

Forget about the so-called shoulder season, as I have said before, Hurricane Harvey has put that on hold. At least 13 refineries from Louisiana to Montana, with a combined 3.27 million barrels a day, have delayed maintenance for weeks or months according to Bloomberg News. They say that while, “refiners such as Valero Energy Corp., Citgo Petroleum Corp. and Flint Hills Resources LLC were able to quickly restart plants in the Corpus Christi, Texas, area shortly after Harvey rolled through, Motiva Port Arthur, Total SA Port Arthur, and Exxon Beaumont are among those still working to reach normal operations. At one point during the hurricane, at least 17 refineries either shut or operated at reduced rates.” That means the normal slowdown in crude demand will be off until spring which will play havoc with the normal seasonal trade. For October crude, the breakout close would be over 5072 and for the November crude, it should be 5515 which is the upper trading band.

This comes as OPEC seems to be doubling down on production cuts. Even Iraq is touting its compliance. Dow Jones reports that Iraq is fully compliant according to the country's oil minister Jabbar al-Luaibi. He said, "Things are going OK. Compliance is about 80% in some cases, maybe 73% in other cases. This is expected. We sense the improvement in the market. It is better than last year", he says. Iraq is fully compliant, and has, in fact, exceeded its share of cuts. The country's current output was around 4.325 million barrels a day, compared to 4.565 million barrels before the output cut became effective in January.

MarketWatch reports that shale crude oil production from seven major U.S. oil plays is expected to see a monthly climb of 79,000 barrels a day in October to 6.083 million barrels a day, according to a monthly report from the Energy Information Administration released Monday. The report has forecast increases in shale-oil output every month so far this year. Oil output from the Permian Basin, which covers parts of western Texas and southeastern New Mexico, is expected to see the largest climb among the big shale plays, with an increase of 55,000 barrels a day. Oil output at the Eagle Ford shale play in South Texas, however, is expected to decline by 9,000 barrels a day. Yet while the EIA talks about increasing shale output it is recently lowered its forecast for total U.S. oil production for this year and next.

DTN spot ethanol prices traded flat to higher in various regional trade hubs, holding firm despite lower corn futures on the Chicago Board of Trade. A trade source said EPA's decision to relax fuel standards contributed to increased demand for ethanol blending in the short term. The EPA waived certain federal requirements under the Clean Air Act for the sale, production and blending of gasoline to avoid supply shortfalls in the aftermath of hurricanes Harvey and Irma in Texas and Florida. Prompt supply ethanol at the Argo terminal in the Chicago cash market was valued flat at $1.59 per gallon. In the rail shipment market, ethanol traded under Rule 11 terms changed hands at $1.57 per gallon, up 1.0 cent, while September barged ethanol at the New York Harbor was pegged unchanged at $1.655 per gallon. In Houston, prompt delivered ethanol was seen at $1.64 per gallon, 1.0 cent higher.

The heat is on with natural gas. Even as lower 48 productions surged to an all-time high, the tight cushion of supply going into winter is starting to awake the bulls. With above normal temperatures using supply, it could set the stage for a breakout rally.

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.