Harvey Highlights Changing Nature of U.S. Production
- Hurricane Harvey first Texas blow since 2008
- WTI oil price impacts are muted
- Offshore U.S. oil and gas production down slightly
- Natural gas prices remain flat
The Matrix
Powerhouse focuses much of this week’s Weekly Energy Situation on Hurricane Harvey because it says so much about how profoundly the world of energy supply has changed.
Hurricane Harvey is the first major hurricane to reach the United States since 2005 when Hurricane Wilma made landfall in October. It is also the first hurricane to hit Texas since 2008 when Hurricane Ike hit the Texas Gulf Coast near Galveston. The storm profoundly affected oil refineries in the region, “bringing life-threatening storm surge, rainfall and wind hazards to portions of the Texas coast,” according to the National Hurricane Center.
Two-day rainfall totals exceeded 20 inches in the Houston area. Coastal areas could be forced to absorb over 18 feet of water.
Hurricane Harvey came ashore as a Category 4 storm. Power failures and significant damage to structures have occurred. As noted in the Washington Post, “Harvey’s footprint will be enormous.”
The impact of a Gulf hurricane on petroleum activity has been reduced because of hydraulic fracturing. The growth of fracking technology really made its potential known in March 2012 when U.S. crude oil production exceeded 6 million barrels daily for the first time since early 2000. In the Energy Information Administration’s (EIA) most recent weekly report, domestic output reached 9.528 million barrels per day.
Important for this discussion is the fact that the Federal Offshore share of domestic crude oil production was 22% in 2012. This year, offshore crude contributes 18% of the national total.
The expansion of U.S. crude oil production has turned historical relationships in the global oil world on their head. We have had, and will continue to have comments on these changes, but nothing demonstrates how profound the changes have been than futures market action as Hurricane Harvey created unprecedented damage in the nation’s major petroleum center.
September West Texas Intermediate (WTI) prices lost over $1 per barrel on Thursday. Facilities have slowed operations. At the time of writing, Monday crude oil futures are trading at $47.30, down 58 cents from Friday’s close. Prices are moving in a tight triangle bounded at $48.75 and $47. One can only wonder what a storm of Harvey’s dimensions might have done to price in pre-fracking storms.
Product futures have reacted more bullishly. RBOB adding around 21 cents and ULSD, 9 cents. Even here, the intensity of market action is less than we have experienced historically.
Supply/Demand Balances
Supply/demand data in the United States for the week ending August 18, 2017, were released by the EIA.
Total commercial stocks of petroleum were unchanged from the previous report week. Builds were reported in stocks of K-jet fuel, residual fuel oil, propane and other oils. There were draws in stocks of gasoline and fuel ethanol. Distillate fuel oil stocks were unchanged from the previous report week.
Commercial crude oil supplies in the United States decreased to 463.2 million barrels, a draw of 3.3 million barrels.
Crude oil supplies decreased in three of the five PAD Districts. PADD 2 (Midwest) crude oil stocks declined 1.7 million barrels, PADD 3 (Gulf Coast) stocks declined 3.7 and PADD 4 (Rockies) stocks fell 0.3 million barrels. PAD District 1 (East Coast) crude oil stocks grew 1.8 million barrels and PADD 5 (West Coast) stocks increased 0.7 million barrels.
Cushing, Oklahoma, inventories decreased 0.5 million barrels from the previous report week at to 56.5 million barrels.
Domestic crude oil production increased 26,000 barrels daily to 9.528 million barrels per day from the previous report week.
Crude oil imports averaged 8.790 million barrels per day, a daily increase of 664,000 barrels. Exports rose 59,000 barrels daily to 936,000 barrels per day.
Refineries used 95.4% of capacity, a decrease of 0.7 percentage points from the previous report week.
Crude oil inputs to refineries decreased 104,000 barrels daily. There were 17.461 million barrels per day of crude oil run to facilities. Gross inputs, which include blending stocks, fell 132,000 barrels daily to 17.708 million barrels daily.
Total petroleum product inventories saw an increase of 3.3 million barrels from the previous report week.
Gasoline stocks declined 1.2 million barrels from the previous report week; total stocks are 229.9 million barrels.
Demand for gasoline rose 107,000 barrels per day to 9.629 million barrels daily.
Total product demand decreased 281,000 barrels daily to 20.678 million barrels per day.
Distillate fuel oil supply was unchanged from the previous report week at 148.4 million barrels. National distillate demand was reported at 4.077 million barrels per day during the report week. This was a weekly decrease of 145,000 barrels daily.
Propane stocks rose 2.9 million barrels from the previous report week to 72.2 million barrels. Current demand is estimated at 942,000 barrels per day, a decrease of 62,000 barrels daily from the previous report week.
Natural Gas
Fracking’s impact on natural gas has been even more impressive than on oil. In 2012, the Federal Offshore accounted for 5.6% of national natural gas production. This year, the offshore accounts for only 3.6%.
Traders looked at the path of Gulf of Mexico storms pre-fracking to determine which product could be affected. Storms in the eastern Gulf affected production of natural gas. Today, Harvey is not influencing natural gas prices, trading at $2.908 at writing, a daily gain of 1.4 cents.
According to the EIA:
Net injections into storage totaled 43 Bcf, compared with the five-year (2012 – 2016) average net injection of 53 Bcf and last year’s net injections of 12 Bcf during the same week. This week’s smaller-than-average net injections primarily resulted from increased cooling demand for natural gas because of warmer temperatures in the South-Central region. Working gas stocks total 3,125 Bcf, which is 45 Bcf more than the five-year average and 223 Bcf less than last year at this time.
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