The US oil refining heartland of Texas has been racked by catastrophic floods in the wake of Hurricane Harvey, shuttering 4 million b/d or about 22% of the country’s refining capacity. The shortage of products in the US has pulled in barrels from Europe and Asia, and also increased demand from its major export destinations, principally Canada, Mexico and other countries in South America. The futures markets, struggling to assimilate and anticipate the various crude and refined product imbalances in the US and globally, face increased volatility. We bring you the bottom line on the emerging picture, based on the operational status of the upstream, midstream and downstream facilities. Separately, we spot red flags in the US crude production growth story — will the resurgence turn into a retreat?
At the best of times, the oil derivatives markets have a testy relationship with the physical world that produces, stores, transports and consumes the commodity. catastrophes in the physical system can produce a funny-mirror reflection in futures. At times, that reflection influences the physical market.
The biggest challenge for the physical markets in the wake of Hurricane Harvey is anticipating, estimating and plugging the fuel supply shortages in the US as well as in other countries not receiving their usual import volumes from the Gulf Coast. A week after the powerful hurricane roared across the Gulf of
Mexico and shuttered capacity upstream, midstream and downstream, the process of redressing those imbalances is already underway, albeit slowly.
For those trading in the futures markets, the test lies in aggregating the constantly evolving status of the production, refining, trade and transportation ecosystems in the US Gulf, projecting it into the future, and making their next move.
The enormity and complexity of that task accentuates fear, knee-jerk reactions, herd behaviour and volatility in the market, which we expect to persist in the coming days.
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Headline crude prices for the week beginning 10 June 2019 – Brent: US$62/b; WTI: US$53/b
Headlines of the week
Midstream & Downstream
A month ago, crude oil prices were riding a wave, comfortably trading in the mid-US$70/b range and trending towards the US$80 mark as the oil world fretted about the expiration of US waivers on Iranian crude exports. Talk among OPEC members ahead of the crucial June 25 meeting of OPEC and its OPEC+ allies in Vienna turned to winding down its own supply deal.
That narrative has now changed. With Russian Finance Minister Anton Siluanov suggesting that there was a risk that oil prices could fall as low as US$30/b and the Saudi Arabia-Russia alliance preparing for a US$40/b oil scenario, it looks more and more likely that the production deal will be extended to the end of 2019. This was already discussed in a pre-conference meeting in April where Saudi Arabia appeared to have swayed a recalcitrant Russia into provisionally extending the deal, even if Russia itself wasn’t in adherence.
That the suggestion that oil prices were heading for a drastic drop was coming from Russia is an eye-opener. The major oil producer has been dragging its feet over meeting its commitments on the current supply deal; it was seen as capitalising on Saudi Arabia and its close allies’ pullback over February and March. That Russia eventually reached adherence in May was not through intention but accident – contamination of crude at the major Druzhba pipeline which caused a high ripple effect across European refineries surrounding the Baltic. Russia also is shielded from low crude prices due its diversified economy – the Russian budget uses US$40/b oil prices as a baseline, while Saudi Arabia needs a far higher US$85/b to balance its books. It is quite evident why Saudi Arabia has already seemingly whipped OPEC into extending the production deal beyond June. Russia has been far more reserved – perhaps worried about US crude encroaching on its market share – but Energy Minister Alexander Novak and the government is now seemingly onboard.
Part of this has to do with the macroeconomic environment. With the US extending its trade fracas with China and opening up several new fronts (with Mexico, India and Turkey, even if the Mexican tariff standoff blew over), the global economy is jittery. A recession or at least, a slowdown seems likely. And when the world economy slows down, the demand for oil slows down too. With the US pumping as much oil as it can, a return to wanton production risks oil prices crashing once again as they have done twice in the last decade. All the bluster Russia can muster fades if demand collapses – which is a zero sum game that benefits no one.
Also on the menu in Vienna is the thorny issue of Iran. Besieged by American sanctions and at odds with fellow OPEC members, Iran is crucial to any decision that will be made at the bi-annual meeting. Iranian Oil Minister Bijan Zanganeh, has stated that Iran has no intention of departing the group despite ‘being treated like an enemy (by some members)’. No names were mentioned, but the targets were evident – Iran’s bitter rival Saudi Arabia, and its sidekicks the UAE and Kuwait. Saudi King Salman bin Abulaziz has recently accused Iran of being the ‘greatest threat’ to global oil supplies after suspected Iranian-backed attacks in infrastructure in the Persian Gulf. With such tensions in the air, the Iranian issue is one that cannot be avoided in Vienna and could scupper any potential deal if politics trumps economics within the group. In the meantime, global crude prices continue to fall; OPEC and OPEC+ have to capability to change this trend, but the question is: will it happen on June 25?
Expectations at the 176th OPEC Conference
Global liquid fuels
Electricity, coal, renewables, and emissions