U.S. releases 500000 barrels of reserve crude to counter Harvey's impact

Tammy Harvey
September 3, 2017

By 11:15 a.m. ET, the new front-month contract in NYMEX gasoline, October, was down $0.0492, or 2.8%, at $1.7300 per gallon. According to AAA, regular unleaded gas hit a nationwide average of $2.52 a gallon on Friday - up seven cents from Thursday's average.

Oil traders are rushing to book tankers to haul European gasoline across the Atlantic Ocean as Hurricane Harvey transforms the global market for refined fuels.

Exactly a week after Tropical Storm Harvey crossed the Gulf of Mexico off Port O'Connor, Texas, almost a quarter of US refining capacity has been taken offline, representing roughly 4.4 million barrels per day, weighing on demand for crude oil, the primary input at refineries.

The U.S. Energy Department said on Thursday it would release a second batch of oil from the Strategic Petroleum Reserve totaling 1 million barrels as Tropical Storm Harvey's disruption of the petroleum industry has spiked motor fuel prices.

The flooding has also knocked out trucking routes to gasoline stations, and many stations in Texas and Louisiana are out of fuel or flooded.

US crude oil stocks fell sharply last week as refineries raised output with the approach of Harvey, the Energy Information Administration said. Gasoline stocks increased by 476,000 barrels, while distillates - decreased by 486,000 barrels. In total, the hurricane had idled 24% of America's 18 million barrels-per-day (bpd) refining capacity. While those production facilities are down, the USA market is losing about 3 million barrels of gasoline a day.

USA gasoline futures RBc1 have rallied roughly 26 percent from the previous week to a two-year high above $2 a gallon, buoyed by fears of a fuel shortage days ahead of the Labor Day weekend that typically brings a surge in driving. They were trading 1.4 percent up at $46.58 a barrel at 1352 GMT.

But then Harvey knocked out about a quarter of US refining capacity and shuttered transport routes for crude, gasoline, diesel and other products.

According to the department, the oil will be delivered to the refinery operated by Phillips 66 in Lake Charles, Louisiana in two emergency transfers of 500,000 barrels with more from the SPR available.

Brent is down about 2 percent and WTI is down 7 percent from the start of August.

"The market has turned in reverse pretty sharply", said Gene McGillian, anager of market research at Tradition Energy.

"Everything is fine until you get a surge in demand", said Alan Gelder, vice president of refining and oil at Wood Mackenzie, adding that "the fear of shortages. can actually create shortages".

Companies also face problems with pressure imbalance and high natural gas levels at new shale oil wells in the Permian Basin, the largest US oilfield.

That's down 14.5 percent from record levels reached in March.

Furthermore, Brazil, Mexico and Venezuela all send heavy crude to the U.S. Gulf Coast for processing, and according to Quigley, these products have a limited number of alternative markets. "But by the end of September, I expect the situation to be nearly back to normal", said Frank Schallenberger, head of commodity research at LBBW.

"We still expect production growth to resume, however Harvey probably pushed it out a couple of months or maybe even a quarter", said analysts at Stifel.

"Best case: the refinery should be up and operating again for the most part by the middle of September".

The Organization of the Petroleum Exporting Countries is frustrated that the storm has not pushed global prices higher, with one OPEC delegate telling Reuters, "It seems no event will move the oil price up much".

Other reports by Ligue1talk

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