Crude: Still in harm's way

The strongest hurricane ever recorded in the Atlantic is promising catastrophic destruction for everything in its path. Hurricane Irma’s impact of financial and commodity markets could be far reaching and we offer prayers for everyone who is harm’s way. To add to the oil market worries, we now have Tropical Storm Katia that has formed in the Gulf of Mexico which will impact some Mexican oil production. A much smaller storm and close to land with maximum sustained winds are at 40 MPH. The storm is moving east/southeast at two miles per hour.    

Crude oil prices are still reacting to the post Hurricane Harvey recovery efforts. Crude prices surged as refiners start to come back online and nervous buyers in Asia start to buy up oil supply. Reuters reported that the spread between Brent and WTI is causing some big Asian buying as refinery shutdowns in the aftermath of Harvey pushed the spread between West Texas Intermediate crude and Brent crude to the widest in two years at nearly $6.00 a barrel. Yet, that spread is coming back as U.S. refiners are trying to come back. The Department of Energy reports that five refineries are in the process of restarting after being shut down and one refinery has begun operations. Six additional refineries in the Gulf Coast are operating at reduced rate.

The nation’s largest refinery, Motiva Enterprises, began restarting partial production as reported by Reuters. Despite lots of flood damage, they were going to restart the large crude distillation unit, hydrocracker and coker at the 603,000 barrel-per-day Port Arthur, Texas. “We expect the refinery to initially return to approximately 40% production by the end of this weekend, provided that the final assessments meet our operational standards,” Motiva spokeswoman Angela Goodwin said in a statement.

The restart news cooled RBOB futures yet still has not brought them down dramatically. Now, depending on the track of Hurricane Irma, this could potentially send prices soaring or crashing on gas, depending on where she makes land fall. One track has the storm hitting Florida straight up the middle of the state which would be bearish for prices as we would see demand destruction at a historic level. Couple that with the demand destruction that we have seen in Texas it would have a major downside compact on price. Of course, another track has us going into Alabama, which would again shut down refineries and impact production and we saw from Harvey that would spike gas prices and bring down West Texas Intermediate (WTI). If we move up the East Coast that too would be a demand destruction event and depending on how far inland the storm goes, would determine the extent of the lost demand for barrels.

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