Oil markets and diesel in particular continued to show little reaction to the impending arrival of Hurricane Laura in a key Gulf Coast refining center, even though the storm has the potential to impact refining in nearly unprecedented ways.
The ultra low sulfur diesel (ULSD) contract on the CME actually declined on the day, dropping 1.54 cents a gallon to $1.2447 a gallon, sliding 1.22%. Although that is more than the settlement of $1.2080 a gallon on Friday, on the backs of a Monday increase of 3.96 cents a gallon and a Tuesday increase of 1.25 cents, the overall increase of just 3.67 cents since the end of last week is striking given the ferocity of Laura.
There also are physical markets that trade as a differential to the CME price for ULSD. In the Platts eWindow price discovery activity for Wednesday, the price of ULSD in the Gulf Coast relative to the CME price held relatively steady from the day before, at 5.5-6 cents a gallon less than the CME price.
However, there is more upward movement in the wholesale price of diesel. The ULSD wholesale price, known in the industry as the rack price, stood Wednesday morning at $1.34 a gallon in the Houston area, up from $1.272 at the start of the week, as shown in this chart from SONAR.
Laura at publication time was projected to be headed dead on into the Lake Charles/Port Arthur refining corridor, near the border between Texas and Louisiana. As the map from S&P Global Platts below shows, it is home to numerous refineries, including the Motiva refinery owned by Saudi Aramco. At 630,000 barrels per day of capacity, it is the biggest refinery in the U.S.
Why would the storm be unprecedented? If Laura hits the area as a Category 4, it will be the first storm to directly hit that Port Arthur/Lake Charles region since storms began being named in 1953. Hurricane Harvey was a Category 4 storm in 2017 but it came ashore south of Houston, though outer bands of rain caused huge flooding, particularly in Lake Charles.
The failure of the diesel market to react significantly to the storm can be tied back to the fact that inventories of diesel and other middle distillates remain elevated. In the simplest measure in the U.S., the number of inventories is divided by average daily demand to produce a number called Days Supply, defined as the amount of consumption that could be covered by stocks if all production and imports ceased. As noted in an earlier FreightWaves story, that number has been above 50 days for most of the pandemic, dropping below 50 just in recent weeks.
Those hefty stock levels are not just in the U.S. S&P Global Platts reported Wednesday that inventories of middle distillates, which include diesel, were up 22% this past week at the key storage city of Fujairah in the United Arab Emirates.
In the latest report issued by the Energy Information Administration (EIA) on Wednesday, days cover for distillates declined again. At 48.5 days, it’s the lowest since the end of May. But it is still well above the five-year average of about 37 days.
While all production certainly isn’t going to cease, the amount of refining capacity at risk in the Lake Charles/Port Arthur area is significant, which highlights just how calm oil markets are in the face of Laura.
As of midday Wednesday, six refineries were reported to have been shut or were being shut: Citgo Lake Charles (425,000 barrels a day), Motiva Port Arthur (630,000 barrels a day), Total Port Arthur (185,500 barrels a day), ExxonMobil Beaumont (360,000 barrels a day), Valero Port Arthur (335,000 barrels a day), and Phillips 66 Lake Charles (290,000 barrels a day).
That’s a significant amount of capacity: about 2.2 million barrels per day in a country that last week put about 14.7 million barrels per day of crude through refineries, according to EIA.
To gauge the possible impact, taking a look at the two recent hurricanes that most impacted the Port Arthur/Lake Charles area — Hurricane Rita in 2005 and Hurricane Harvey in 2017 — offers some hints but no inescapable conclusion.
Rita hit the Port Arthur/Lake Charles area more head-on than Harvey and caused extensive disruption to the refining activities. But as noted, Harvey was a Category 4 that didn’t hit head-on, though it did do an extensive amount of damage via flooding. Rita was a Category 3 storm.
As far as diesel, looking at DOE/EIA data on the amount of distillate produced by refineries in PADD 3, which includes the Gulf Coast, the impact in 2005 from the back-to-back hits of Hurricanes Katrina and Rita sent PADD 3 distillate output (which is mostly diesel) down from 2.15 million barrels a day just before Katrina to as low as 875,000 barrels a day soon after Rita. Refineries did not regain the 2.15 million level of distillate output in PADD 3 for more than a year.
But as far as the impact on the retail price of diesel, it was short-lived. Just before Katrina hit, the DOE weekly diesel price was about $2.59 a gallon. By the third week of October, about a month after Rita, it was $3.15. But by Thanksgiving week, it was down to about $2.50.
The drop in diesel output from Harvey was not as extensive. Just before Harvey hit, PADD 3 distillate production was just over 3 million barrels a day. It fell as low as 1.76 million barrels a day as a result of the storm, following several refinery closures in the Port Arthur/Lake Charles area. But it was back over 3 million barrels per day by the second week of November, according to EIA data.
The post-Harvey price started with a DOE diesel price of about $2.60. It was up to $2.80 two weeks after the storm hit. The price then marched toward a $3-per-gallon level as 2018 started, but with output from PADD 3 back to pre-storm levels, Harvey can’t be fingered as the culprit.
As far as crude, it is reacting as mildly as diesel. At $43.39 a barrel for West Texas Intermediate crude, it is up just $1.05 a barrel since last Friday. U.S. crude oil inventories measured in days supply were at 34.7 days in the latest weekly report issued by EIA, down sharply from 42 days in early May. Production in the Gulf of Mexico has seen shut-ins of 84.3%, about 1.55 million barrels a day. As the storm comes ashore, even if there is onshore flooding impacting refineries, platforms can return to operation quickly. But the closures that have been in place are likely to hit U.S. inventories again next week.