Search
  • bkkelly6

A Hurricane and an OPEC Meeting

Author: Brynne Kelly 8/29/2021


OPEC+ members are scheduled to meet on Wednesday, September 1 to discuss the status of production cuts and decide whether or not to make any changes to their current plan. Normally this would be front and center, with market participants eagerly awaiting the headlines that typically accrue as we approach the actual meeting date. This is taking a back seat at the moment to Hurricane Ida.


Ida made landfall at 11:54 CDT, August 29, 2021 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. Today's BSEE (Bureau of Safety and Environmental Enforcement) report shows 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) is 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). LOOP is a deepwater port in the Gulf of Mexico 29 kilometers (18 nautical miles) off the coast of Louisiana near the town of Port Fourchon. LOOP's onshore facilities, Fourchon Booster Station and Clovelly Dome Storage Terminal, are located just on-shore in Fourchon and 25 miles (40.2 km) inland near Galliano, Louisiana. The Fourchon Booster Station has four 6,000-hp (4.5 MW) pumps which increase the pressure and crude oil flow en route to the Clovelly Dome Storage Terminal. LOOP provides tanker offloading and temporary storage services for crude oil transported on some of the largest tankers in the world. Port Fourchon currently services over 90% of the Gulf of Mexico's deepwater oil production. There are over 600 oil platforms within a 40-mile radius of Port Fourchon. This area furnishes 16 to 18 percent of the US oil supply.


This port was damaged by Hurricane Lili in October 2002. It did not take a direct hit by Hurricane Katrina on August 29, 2005, and was only slightly damaged.


The Mars Pipeline System is part of LOOP and originates approximately 130 miles offshore in the Deepwater Mississippi Canyon and terminates in salt dome caverns in Clovelly, Louisiana. It is a strategic major corridor crude oil pipeline in the Gulf of Mexico. According to Argus, the Mars oil stream is a light sour crude oil with quality parameters of 28 degrees API gravity maximum and 1.93% sulfur maximum. The Mars system is part of the ARGUS Sour Crude Index™ (ASCI™) daily price index which reflects medium sour crude at the US Gulf coast trading hub, and is used primarily by Saudi Arabia, Iraq and Kuwait to price exports to the US. U.S. sanctions on Venezuela (a major supplier of heavy crude), pipeline constraints in Canada and production issues in Mexico (of the heavy Mayan blend) have pushed demand for Mars and other sour crudes higher as U.S. refiners scrambled to secure new supplies.


Given the path of Ida, it's likely that the LOOP/Mars system will sustain some type of damage. This is a system that handles imports, exports, off-shore production and refinery supply. Specifically, the Mars Pipeline System:

  • Gathers from producers in: Mississippi Canyon

  • Gathers from pipelines: Ursa, Medusa, and Amberjack

  • Delivers to terminals: Chevron's Fourchon Terminal and LOOP Clovelly Terminal

  • Delivers to pipelines: Clovelly to Houma, Clovelly to Norco, LOCAP, and Chevron’s Fourchon to Empire pipeline

The primary interface point on shore occurs at the Clovelly Terminal which is slightly inland from the Fourchon Port. The Clovelly Hub distributes crude oil to connected refineries through the Clovelly-Alliance-Meraux (CAM) pipeline, Clovelly to Norco pipeline, and the LOCAP pipeline (a 55-mile common carrier crude pipeline from the LOOP Clovelly Salt Dome facility to the active trading hub of St. James, Louisiana). The LOCAP pipeline transports crude oil from the Clovelly Hub to St. James, LA, supplying several Louisiana refineries and making a connection to Capline for distribution to refineries in the Midwest.

LOOP has direct access to the following refineries in Southeast Louisiana which represent a refining capacity of over 1.1 million barrels per day:

  • PBF Chalmette Refinery

  • Motiva Norco

  • Phillips 66 Alliance

  • Shell St. Rose

  • Valero Meraux

  • Valero St. Charles

From the Clovelly Hub, crude oil can be transported to the LOCAP terminal in St. James, LA. The LOCAP pipeline and terminal are operated by LOOP. Crude oil arriving at the St. James terminal can be dispatched to any one of five local refineries serving Louisiana which represent a refining capacity of over 1.4 million barrels per day:

  • The Motiva refinery in Convent

  • The Marathon refinery in Garyville

  • The ExxonMobil refinery in Baton Rouge

  • The Placid refinery in Port Allen

  • The Alon refinery in Krotz Springs


How much of this infrastructure has been damaged by hurricane Ida is still unknown.

One of the key themes related to storms and refinery outages has been related to loss of power. It seems likely there will be significant power outages in Louisiana as it's already been reported by nola.com that all of New Orleans is without power after Hurricane Ida leaves 'catastrophic transmission damage'.


Crude Futures Curve Comparisons

Light sweet crude oil production from Louisiana and Texas accounts for a significant portion of the LLS-quality crude that is blended and traded in St James, LA. Light sweet crude produced in the Eagle Ford and Permian regions in Texas is frequently shipped via pipeline and barge to the hub in St. James, and blended into the LLS stream. It typically trades at a premium to WTI at Cushing and Houston and is tightly correlated to moves in Brent.


Futures curves as of last Friday's close show where LLS and Mars crude blends are priced relative to WTI, Oman and Brent. Rather than focusing on WTI futures moves, it's the moves in crude grades (LLS and Mars) and the pipeline system in Louisiana that should lead, telling the story of where the fundamental issues lie.

Given Ida's path, both the Clovelly and St. James terminals could sustain operational damage. If so, we would expect both the LLS/WTI and Mars/WTI spreads to strengthen. The market has become so efficient that it no longer moves higher and lower in tandem, instead it focuses on relationships weakening or strengthening.


Supply and Demand Comparison to Past Storms/Events

Trying to unpack the market impact due to a major storm like Ida becomes a numbers game: Refinery capacity vs Production (aka, demand vs supply). Which side of the equation will be most impacted? For some perspective we look at the refinery throughput vs production impacts of previous storms.


Refinery Throughput vs Production

On the demand side of the ledger we have refining capacity. Total operable refining capacity in Louisiana is around 3 million barrels per day. It's reasonable to assume that not all of this will sustain long term impacts. The following charts depict the impact of previous storms on refiner throughput . Interesting that one of the more significant decreases in refiner throughput in the last 2 decades was the one we saw earlier this year caused by winter storm Uri (left chart below, purple line).


On the supply side we have production. As noted earlier, roughly 1.75 mbpd of US Gulf Coast crude oil production is off-line ahead of the storm. The chart below (on the right) compares crude oil supply by year. In this case, we consider US crude oil production plus net crude oil imports to represent available supply. Net imports give refiners an ability to manage overall supply, but the storm effects are still quite evident by year.


As of week ending August 20th, refiner throughput and total crude oil supply are at similar levels to 2005, just before hurricanes Katrina and Rita made landfall. There is ample room in storage to accommodate the loss of demand that could materialize should refiners take the larger hit due to Ida.

Another big hit to supply happened in late August, early fall of 2020 (after the initial Covid-19 lockdowns) from storms like Laura, Delta and Zeta (pink line, right chart above). At its peak, Hurricane Laura forced the evacuation of all 16 dynamically positioned drilling rigs (which are not physically tethered to the seafloor), 11 of the 12 non-dynamically positioned drilling rigs (which are physically moored to the seafloor), and nearly half of the 643 offshore production platforms operating in the Federal Offshore Gulf of Mexico. This was at a time when production and refinery utilization were already well below normal and helped to draw down the inventory that accumulated due to Covid-19.


In 2008, according to BSEE reports, Hurricanes Gustav and Ike shut in at least 69 million barrels over a span of 168 days. Compare that to 2005 when hurricane Katrina and later hurricane Rita collectively shut in at least 163 million barrels of production over a span of 298 days. To date, the cumulative barrels of USGC oil production offline due to Ida is around 4.5 million barrels (8/27-8/29). The Sunday night Nymex session has so far been uneventful, cautiously trying to vote that the demand side of the equation (aka, refiner throughput) will be much greater than losses of supply (production outages). The coming days will provide much more clarity. One thing to keep in mind is that this is not a Texas storm. Louisiana is less populated than Texas and has 40% less refining capacity than Texas.


The picture is a bit different when comparing the impacts of various storms on gasoline demand and inventory. But for the drop in demand due to Covid-19, gasoline demand (implied by product supplied) does not show the variability that we saw in the crude oil demand chart above.

Notice how much smaller the variability in demand is for gasoline due to storms (right chart above, weekly gasoline supplied by refiners) than they are for crude oil markets. Rather, it's gasoline inventories that seem to absorb disruptions to supply (left chart above, EIA weekly gasoline inventory). With US gasoline inventories at decade lows, a big loss in refinery capacity should lead to draws from gasoline inventory if refiners are slow to return operations due to damage or power outages.


OPEC

The increase in oil output agreed last month by OPEC+ nations could be reconsidered at it's next meeting on September 1, Kuwait's oil minister said on Sunday. The group will meet on Wednesday to discuss the previously agreed increase of 400,000 bpd for the next several months. “The markets are slowing. Since COVID-19 has begun its fourth wave in some areas, we must be careful and reconsider this increase. There may be a halt to the 400,000 (bpd) increase,” Mohammad Abdulatif al-Fares told Reuters on the sildelines of a government-sponsored event in Kuwait City.


Given the uncertainty surrounding markets going in to the meeting, expectations of a straightforward rollover of the existing agreement (easing the cuts by 400k per month through May 31, 2022) are building.


The coming hours will tell the story on Gulf production and refinery outages, as reports of damage and estimates for power restoration trickle in. The market has made so much progress towards clearing out the excess inventory built in 2020.

Keep that in mind as storm damage details begin to crystalize over the next several days. Storage operators have made 'room' for events like this. All eyes are now on the refiners.



_______________________________________________________________________



EIA Inventory Statistics Recap


Weekly Changes

The EIA reported a total petroleum inventory DRAW of 4.50 for the week ending August 20, 2021 (vs a net DRAW of 5.30 last week).



YTD Changes

Year-to-date cumulative changes in inventory for 2021 are DOWN by 104.70 million barrels (vs down 100.20 million last week).



Inventory Levels

Commercial Inventory levels of Crude Oil (ex-SPR) compared to prior years are have gone from way above historical levels to slightly below historical levels and should continue to draw as long as backwardation in the market persists.











1,013 views0 comments