Oil: A Storm Surge

Tropical storm Harvey has the potential to be the first hurricane to hit the Texas coast since 2008 and could be on a path to hit directly into the heart of the U.S. “Refinery Row” which equates to about one-third of capacity and running about 7 million barrels a day. One track of the storm has it hitting a cluster of about 5 refineries. Industry sources I am talking to are getting very worried about the track of this storm and while refineries are better prepared for storms than they were a decade ago, and the hurricane is only expected to be a category one, it is hard to not worry about what could be a direct hit.

We are already seeing gas and diesel prices spike in anticipation of the storm. In Texas, they have many major refineries and if they are shut down or flood they could see gas prices soaring $25 cents a gallon or higher. Gas prices have already risen 5 to 7 cents a gallon from yesterday’s lows on strong US demand and the possibility of storm impact. Diesel prices are on the rise as well. Industry insiders are nervous. They say if it hits as hard as they think, it will float tank batteries away unless there full or cabled down. Tank batteries are a group of tanks that are connected to receive crude oil production from a well or a producing lease. A tank battery is also called a battery. In the tank battery, the oil volume is measured and tested before pumping the oil into the pipeline system. Tropical Storm Harvey is going near refinery Row and 5 or 6 refineries could take a direct hit. That could lead to flooding and power loss etc. If we have major damage to two or more refineries, the spike could be even higher.

Oil prices are subdued even as oil inventories fell. One reason was weekly 26,000 barrel increase in U.S. oil production. The lower 48 and shale had a modest jump and a bigger jump happened in Alaska. Yet the weekly numbers have not been jiving with the monthly number so we suspect that production is being overstated. Still, a big 3.327 drop in crude supply continues the crude oil supply drain. Cushing, Oklahoma stocks fell by 503,000 barrels and should fall by at least that amount next week. OPEC Imports are falling hard. My buddy Matt Smith at Clipper Data says that deliveries from key suppliers such as Saudi Arabia dropped despite rising flows from others such as Angola and Libya. After accounting for as much as 72 percent of U.S. waterborne deliveries in March, OPEC deliveries last month dropped to 65 percent, and are tracking even lower so far in August.