Hints of normality and Laura’s minimal impact

Gasoline and diesel demand continue to rise slowly and are even beginning to approximate “normal” levels. Hurricane Laura threatened to disrupt key nodes of the U.S. oil and gas complex, but both Port Arthur and Houston appears to have been largely spared. Hurricane Laura proved weaker than feared, and the U.S. oil complex will face only minor disruptions.

Normal Would Be Nice

For the first time since March, both gasoline and diesel demand have recovered to within their “normal”, 5-year max-min band. Gasoline stocks are also gradually returning to normal levels, with gasoline days-of-supplies (as calculated by the EIA) down to 27.1 days, down from 49 days in late April. Diesel demand of ~4.0 Million Barrels Per Day (MMBPD), meanwhile, is slightly above five-year averages. As has been the case since March, however, jet fuel demand is lagging other crude products. While the TSA reports airline demand continues its slow recovery, passenger throughput is still 65-75% lower than year-ago levels.

Hurricanes and Crude: A Very Short History of Harvey

Let’s discuss likely effects from Hurricane Laura. First, refinery inputs are going to fall sharply and could remain low for several weeks – although the effects will very likely be much less significant than seen during Hurricane Harvey in 2017. Amid that storm, crude inputs fell from 17.8 MMBPD to 14.5 MMBPD due to widespread refinery closures and problems in the Houston and Corpus Christi ship channels. Refineries didn’t return to “normal” operations until late September (or, arguably, October) – several weeks after the initial hurricane strike on August 24th. We expect fewer (and much shorter) refinery shut-downs this time, with reported refinery closures or run reductions of only 2.23 MMBPD. As of this writing, Port Arthur and Houston have seen very minimal damage. We expect all Gulf Coast refineries to return to normal operations very quickly.

During a hurricane, crude production decreases sharply for a week, then snaps-back immediately. The lion’s share of U.S. crude production is inland and unaffected by hurricanes, and offshore rigs and crews are able to return to the Gulf of Mexico within a week. During Hurricane Harvey, production fell by only 8% for week, and then immediately returned to prior levels. Similarly, Hurricane Laura will have only a very minor impact on production.

Hurricanes impact shipping and weigh on exports and imports. Tankers must steer clear of hurricanes, which can disrupt shipments by several days. More importantly, hurricanes disrupt loading and unloading crude at export and import terminals, which can lead to weeks-long backlogs.

How do hurricane dynamics effect crude storage levels? As we noted above, crude production stays relatively constant, refinery runs are reduced, and export and import shipments face delays. The sum of these trends tends to produce crude inventory builds, while gasoline inventory declines. PADD 3 crude inventories rose by ~14 million barrels in the two weeks after Harvey; not coincidentally, gasoline inventories fell by a similar amount, or about ~11 million barrels. Another Harvey-like event would lead to even larger crude builds (since U.S. crude production and exports are much higher than in 2017), but Hurricane Laura has largely spared the crude complex.

Crude dodged a hurricane, LNG might not be so lucky

Hurricane Laura appears to have missed almost the entire crude supply chain from Houston to Port Arthur, and oil operations will likely return very quickly. The minor hurricane may lead to a minor build in crude inventories, but will have little long-term impact. The storm could have a larger effect on the two existing LNG export terminals in the area, Sabine Pass LNG and Cameron LNG, as well as two LNG projects under construction, Calcasieu Pass LNG and Golden Pass LNG.

Keep western Louisiana in your thoughts today. Over 400,000 individuals in Louisiana are without power and photos from the area are gut-wrenching. Stay strong Lake Charles.