Author: Brynne Kelly 9/26/2022
Summary
Even as Tropical Storm Ian is one day closer to Florida, many outcomes remain in play and SW Florida to the Panhandle should prepare for a hurricane. The NHC stated that "lan is expected to be a major hurricane in the eastern Gulf of Mexico during the middle of the week, but uncertainty in the long-term track and intensity forecasts is higher than usual."
A NOAA satellite image of Hurricane Ian on Monday, Sept. 26, 2022. [ NOAA ]
As exciting as tracking the first big hurricane of the season can be, there are only a few practical outcomes from an oil market perspective. Demand vs Supply; Production vs Refinery capacity. As always, traders want to know which side of the equation will be most impacted?
Offshore damage to production - SUPPLY, or
Onshore damage to infrastructure - DEMAND (refinery damage, pipeline or port damage or end-user demand due to power outages.)
Of course the unwritten option is that neither of the above are relevant as the storm could weaken and/or make landfall away from key infrastructure concentrations.
For now, Ian's path appears to pose a threat to the Port of Tampa rather than the refining complex in Texas and Louisiana. We know a lot about the refining corridor in those areas. Lesser known is the Port of Tampa. Did you know that this port serves as an energy gateway for Florida, providing 43 percent of the state's fuel or that the region's fuel arrives by ship into Port Tampa Bay?
This storm's path is not one we have seen lately. Recent history has thrown storms at us that threaten US Gulf Coast production and refining capacity. So, how do owe handicap Ian?
Before we assess those risks and their potential effects, here is the current backdrop against which this must all be weighed.
Non-Hurricane Items
The backdrop in place as we watch the first significant storm threat to the US Gulf Coast is one of serious chaos in bond and equity markets. In fact, Friday saw the highest put option volume in history at just shy of 34 million contracts. We also have an OPEC meeting on the horizon. One that could prove more pivotal of late as the long side of the market implores OPEC+ to do “something” when the alliance meets again Oct. 5.
Headlines over the weekend confirm the market is more focused more on political and recession fears than a storm:
China Tells Blinken: US Sending 'Dangerous Signals' On Taiwan - RTRS
US And Philippines Increase Military Ties Over China Threat - FT
North Korea Fires Ballistic Missile Ahead Of US VP Harris Visit - RTRS
Stock Traders Brace For Steeper Dive As Fed Ups Recession Fear - BBG
Klain: Next sale from US SPR reserve will offset OPEC's production cuts- RTR
Fed's Bostic spoke to CBS Face the Nation on Sunday and noted that "Inflation is too high, and we must do everything possible to bring it down". Further stating that "demand is beginning to contract, which will eventually pay dividends in terms of inflation levels". We need to slow down, he said. There is no doubt about it.
Additionally, word from the Biden camp over the weekend from a readout of the President's meeting with his economic team was that Biden wants to put pressure on the energy industry to lower gasoline prices. We know that he has been 'buying down' oil and gas prices via SPR inventory, so it's not out of left field that he is still focused on using any and all tools in his toolkit to continue applying pressure on prices.
We lay this backdrop out because it may overshadow the market's ORGANIC response to a weather issue. The fundamental backdrop we highlighted in last week's report is how important US Commercial Inventory levels are going forward, even as they have remained precariously unchanged this year:
".....the market has cared less about the need to restock the SPR than many fear. Therefore, absent a material news item about the SPR, the markets activity should continue to be more dependent on the trajectory of commercial crude oil inventories. Independent of the SPR needing or not needing to be refilled, the slope of the Commercial inventories matters."
Enter Hurricane Ian, a storm heading into the US Gulf coast that has the potential to disrupt short-term supply/demand dynamics. Whether that potential manifests remains to be see, but until it does we lay out 2 practical scenarios in isolation and the type of impact they had on markets in previous years. After that we list the risks currently posed as of this writing for Ian in that context.
Scenario One: Offshore Damage to Production
This is an oil supply story. In this scenario, the impact of the hurricane is felt primarily by off-shore gas and oil production that is shut-in ahead of and during the storm with little on-shore infrastructure damage to pipeline systems or refinery operations. This alone usually isn't enough to move the dial on oil prices if the shut-in's are pre-emptive and resume once the storm has passed.
Don't be surprised if we kick off this week with reports of platform evacuations and production shut-ins. To track this, the market turns to the Federal Bureau of Safety and Environmental Enforcement (BSEE). They provide a daily report of the amount of production being shut-in ahead of a storm.
The current path of Ian is projected to track far to the east of where the bulk of the US refining infrastructure (located in Texas and Louisiana) operates.
Historical Example for Comparison
On August 29, 2021 Ida made landfall as an extremely dangerous category 4 hurricane near Port Fourchon, Louisiana, with maximum sustained winds of 150 mph and a minimum central pressure of 930 mb (27.46 inches). Sixteen years to the day after Katrina. One day later, BSEE reports showed that over 95% of the US Gulf Coast offshore crude oil production (out of 1.8 mbpd) and almost 94% of natural gas production (out of 2,230 MMCFD) was shut in. Port Fourchon is Louisiana’s southernmost port, located on the southern tip of Lafourche Parish, on the Gulf of Mexico. It is a seaport, with significant petroleum industry traffic from offshore Gulf oil platforms and drilling rigs as well as the Louisiana Offshore Oil Port pipeline (LOOP).
This type of damage is not projected from Hurricane Ian. In the broader scheme of things, oil price moves related to hurricanes don't hardly register in comparison to other events.
Continuous WTI Month-1 Futures Prices by Year...
Given the upcoming OPEC meeting, might any significant production damage only serve to influence the timing of any output cuts OPEC might be considering? Probably not, but something to think about.
Scenario Two: Onshore Damage to Refineries
Flooding, power outages and other infrastructure damage are the real risk to the refining complex in a storm's path. Anything that disrupts the ability of refiners to operate sends oil back to inventory and leads to draws of refined product inventories.
Historical Example for Comparison
One of the defining characteristics of hurricane Harvey in 2017 was the impact it's flooding had on the refining complex. Prior to the storm, US refiners were running at greater than 95% utilization. Once the storm hit, this dropped immediately below 80%. This drop was almost equal in magnitude to the drop in utilization we saw this past March when pandemic destroyed demand.
Damage to the US refining complex from some of the more extreme storms including Harvey can be seen below in a comparative chart of US refinery utilization rates over the last 9 years. Here are a couple charts that illustrate the scope of that type problem.
Hurricanes Impacting Refinery Utilization...
The compromise of refinery throughput is what the market reacts to. It compromises both sides of the equation: Oil Demand and Product Supply.
Note the movement in gasoline cracks that correspond to utilization drops noted above.
Crack Spreads during Hurricanes and Onshore Damage...
Infrastructure Risks Posed by Hurricane Ian
For now, Ian's path appears to pose a threat to the Port of Tampa rather than the refining complex in Texas and Louisiana. This port serves as an energy gateway for Florida, providing 43 percent of the state's fuel. The region's fuel arrives by ship into Port Tampa Bay.
Economic Impact Potential for Florida
The gasoline shipped to Florida from the USGC arrives via a limited fleet of coast-wise-compliant (Jones Act) U.S.-flagged tankers, articulated tug-barges, and smaller barges that travel along the Intracoastal Waterway and the open waters of the Gulf of Mexico. However, this fleet is relatively small, and increasing demand for vessels to move U.S.-produced crude oil along the Texas and Louisiana coasts has diverted many vessels that had been moving products to Florida.
The state of Florida has overtaken New York as the 3rd most populous state with over 20 million people. The Tampa Bay/Orlando I-4 corridor also has the 10th largest economy in the U.S. with a GDP of more than $300 billion.
With that in mind, it is reasonable to expect that Ian threatens to impact fuel deliveries into the state. Fuel shortages and power outages are expected. The question is whether or not this localized problem will have knock-on effects elsewhere.
Product Pain Points
The pain points are product inventories. A comparison on gasoline and distillate inventory levels relative to prior year levels reveal that other storms have caused product inventories to decline.
US Weekly EIA Gasoline and Distillate Inventories...
This is what we are keeping an eye on. Wildcard draws in product inventories from current levels would be a bit of a wrinkle this fall as product builds are needed ahead of this winter. This could buck the trend of 'recession' price pressure. Other than that the risks are standard if history is any guide.
Bottom Line
Hurricane season has been a non event thus far as Ian threatens landfall. Of the two major energy risks associated with hurricanes - Offshore damage to production and Onshore refinery damage - So far refineries seem to be well out of Ian's path. The most likely problems, if they occur, will be due east of where most refinery infrastructure is located. That puts Florida in the cross hairs and the possibility of supply disruptions exist, especially in light of the relatively small fleet size Florida depends on.
How markets react to any bad news that Ian does cause could be a trial run of what these markets have (or do not have) in store for us if we get a cold snap later on. If this marks the end of a tepid hurricane season, then we should assume the drivers outlined previously will reassert themselves.
Addendum: As we write this and check for last minute news items headlines are beginning to come out on Florida connecting Hurricane Ian risk to their economy. Stories asking How soon can Tampa reopen? are already in play setting the table for tomorrow's coverage if the Hurricane does stay on the path it is on.
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EIA Inventory Recap - Week Ending 9/16/2022
Weekly Changes
The EIA reported a total petroleum inventory DRAW of 2.90 for the week ending September 16, 2022. Commercial inventories however, posted a weekly BUILD of 1.10 while SPR inventories DREW by (8.40).
YTD Changes
YTD total petroleum EIA inventory changes show a DRAW of 181.3 through the week ending September 16, 2022. The bulk of this is due to drawdowns in SPR inventories.
Inventory Levels
Gasoline and Distillate inventory levels are now both below their 5-year average for this time of year.
