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Today’s markets: Unprecedented energy challenges


The Gulf Coast and Houston are in our prayers as they face unprecedented challenges in the aftermath of Hurricane Harvey. Hurricane Harvey, the strongest Texas hurricane in 50 years, brought record rainfall and unprecedented flooding. It may take years for the area to recover and it is going to be a historic challenge for the US energy sector. The storm has shut about 15% of US refining, cutting fuel-making capacity output by an estimated 2.2-2.7 million barrels a day. The National Hurricane Center said that this event is unprecedented and all impacts are unknown and beyond anything experienced. That also means that the heart of the US energy industry will face challenges unlike anything they have seen and it could be months or years before we get back to normal. This comes as Hurricane Harvey could regain strength and the possibility of another storm in the Gulf of Mexico next week.

The Houston Shipping Chanel is still closed and so even if some refiners come back on line, they can’t move product. This drove RBOB gas futures to a 2 year high and diesel prices spiked as well. Gas shortage fears are driving retail prices and there are warnings about price gouging to retail stations by the oil companies. We know that the market is reacting to that but this is going to change as more news comes in.

West Texas oil futures fell as the market expects that refineries will demand less oil as they take weeks, maybe longer, to come back on line. Brent crude on the other hand stayed stronger as the US will demand product from Europe as well as some shut down of Libyan oil production over the weekend. With more rain expected and the possibility that Hurricane Harvey could strengthen again the impact on the US energy sector will be unprecedented.

The impact on production and refining is big. The Wall Street Journal reports that Exxon Mobil Corp. closed its Baytown refinery, located on the Houston Ship Channel, when floodwaters paralyzed large portions of the area. The plant is the second-largest refinery in the country, processing as much as 560,000 barrels of oil a day and feeding fuel into pipelines and barges that move it across the southeastern U.S. and up the East Coast.

Reuters reports that Texas is home to 5.6 million barrels of refining capacity per day, and Louisiana has 3.3 million barrels. Over 2 million barrels per day (bpd) of refining capacity were estimated to be offline because of the storm. To avoid a fuel shortage, U.S. traders were seeking oil product cargoes from North Asia, several refining and shipping sources told Reuters on Monday. About 22 percent, or 379,000 bpd, of Gulf production, was idled due to the storm as of Sunday afternoon, according to the U.S. Bureau of Safety and Environmental Enforcement. There may also be around 300,000 bpd of onshore U.S. production shut in, trading sources said according to Reuters. There is no word on how the flooding will impact futures shale output as the Eagle Ford area is flooded in many areas.

Colonial Pipeline that takes gasoline and diesel up the East Coast is still operating. Valero Energy Corp. said its two refineries in the Corpus Christi area that were shut before Harvey came ashore Friday didn’t sustain much damage, so the company was looking for a way to restart operations. Bringing them back also requires the port to be functional. Valero didn’t estimate when the two plants would go back into service.

According to the Journal, there is enough gasoline in storage to cover 23.7 days of demand, compared with 20.5 days in the weeks before Katrina, according to the U.S. Energy Information Administration. East Coast storage tanks hold more than 63 million barrels of gasoline, a supply of more than two weeks, compared with about 52 million before Katrina. The global impact of Harvey could be more dramatic. Gulf Coast refineries have become more important suppliers of fuel around the world in recent years, with 17% of the gasoline and 39% of the diesel generated in the region sold to overseas buyers, according to consulting firm Turner, Mason & Co.

The Bureau of Safety and Environmental Enforcement (BSEE) reported yesterday that data from offshore operator reports submitted as of 11:30 CDT today, personnel have been evacuated from a total of 105 production platforms, 14.25 percent of the 737 manned platforms in the Gulf of Mexico. Production platforms are the structures located offshore from which oil and natural gas are produced. Unlike drilling rigs, which typically move from location to location, production facilities remain in the same location throughout a project’s duration.

Personnel have been evacuated from five rigs (non-dynamically positioned (DP) rig), equivalent to 50 percent of the 10 rigs of this type currently operating in the Gulf. Rigs can include several types of offshore drilling facilities including jackup rigs, platform rigs, all submersibles and moored semi submersibles. One DP rig has moved off location out of the storm’s path as a precaution. This number represents 4.7 percent of the 21 DP rigs currently operating in the Gulf. DP rigs maintain their location while conducting well operations by using thrusters and propellers, the rigs are not moored to the seafloor, therefore, they can move off location in a relatively short time-frame. Personnel remain on-board and return to the location once the storm has passed.

As part of the evacuation process, personnel activate the applicable shut-in procedure, which can frequently be accomplished from a remote location. This involves closing the sub-surface safety valves located below the surface of the ocean floor to prevent the release of oil or gas. During previous hurricane seasons, the shut-in valves functioned 100 percent of the time, efficiently shutting in production from wells on the Outer Continental Shelf and protecting the marine and coastal environments. Shutting-in oil and gas production is a standard procedure conducted by industry for safety and environmental reasons.

From operator reports, it is estimated that approximately 21.64 percent of the current oil production of 1,750,000 barrels of oil per day in the Gulf of Mexico has been shut-in, which equates to 378,633 barrels of oil per day. It is also estimated that approximately 25.71 percent of the natural gas production of 3,220 million cubic feet per day, or 827.89 million cubic feet per day in the Gulf of Mexico has been shut-in. The production percentages are calculated using information submitted by offshore operators in daily reports. Shut-in production information included in these reports is based on the amount of oil and gas the operator expected to produce that day. The shut-in production figures therefore are estimates, which BSEE compares to historical production reports to ensure the estimates follow a logical pattern.

After the storm has passed, facilities will be inspected. Once all standard checks have been completed, production from undamaged facilities will be brought back on line immediately. Facilities sustaining damage may take longer to bring back on line. BSEE will continue to update the evacuation and shut-in statistics at 1:00 p.m. CDT each day as appropriate.

— Phil Flynn


The Corn & Ethanol Report: UK summer bank holiday

Hurricane Harvey was all that was advertised with heavy rains the people in Texas were quoted “I never saw this in my lifetime.” It is still too early to assess the damage but rest assured the damage is done. Refinery closures and the ports of Corpus Christ, Galveston and Houston are closed and as we assess the damage we will work on how soon we can safely get these ports back in business. The effect of this storm is going into several commodity sectors, such as, Soybeans and other Grains, Crude Oil and Natural Gas just to paint a picture. In the overnight electronic session the October Crude Oil is currently trading at 4755 which is 32 points lower. The trading range has been 4820 to 4720.

On the Corn front the market is mostly quiet as investors the market assess the weather and the impact of Hurricane Harvey will have in this market. In the overnight electronic session the September Corn is currently trading at 338 which ¾ of a cent lower. The trading range has been 340 ¼ to 337 ¾.

On the Ethanol front the market was quiet posting no trades posted in the overnight electronic session. The October contract settled at 1.448 and is currently showing 5 bids @ 1.440 and 5 offers @ 1.445 with Open Interest at 887 contracts.

On the Natural Gas front the September contract is set to expire tomorrow so we will shift our focus to the October contract as we assess the impact Harvey had on this market. In the overnight electronic session the October contract is currently trading at 2.894 which is 3 cents lower. The trading range has been 2.950 to 2.891.

— Daniel Flynn


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