Hurricane Harvey Is A Disaster For OPEC

Authored by Nick Cunningham via OilPrice.com,

The skies are clearing over Houston, but the damage from the remaining elements of Hurricane Harvey has spread east to Port Arthur and Lake Charles along the Texas-Louisiana border. That has knocked more refineries offline, including the largest refinery in the United States.

In the aftermath of the storm, the most serious threat to the energy industry is the extended outage of refineries and pipelines, according to Goldman Sachs. The problem actually looks worse than it did earlier this week as the deluge has shifted towards Port Arthur, another refining hub. Motiva, which runs the U.S.’ largest refinery in Port Arthur, began to completely shut down its 600,000 bpd facility on Wednesday.

Goldman says the refinery shut downs, as of August 30, have spiked to 3.9 million barrels per day (mb/d), although upstream oil production outages have dropped below 1 mb/d. More ports are now closed – in addition to Corpus Christi and Houston, the ports of Lake Charles, Beaumont, and Port Arthur have shut down.

These outages, the investment bank says, will mean that the “ongoing recovery in production will only be partial.” The refinery and pipeline closures are “leaving the oil market long 1.9 mb/d of crude vs. last Thursday, short 1.1 mb/d for gasoline and 0.8 mb/d for distillate.”

More worrying is that the recovery might not be quick. While most refineries had controlled shut downs, there are quite a few, especially in the Port Arthur region, that have been inundated with water, which means that the damage to them is still unknown. Based on the past major hurricanes of Rita and Katrina, Goldman speculates that about 10 percent of the 4 mb/d of refining capacity that has been disrupted will remain offline for several months.

Other analysts agree that the damage could result in lengthier outages than many had hoped. “I"m actually quite concerned about Beaumont-Port Arthur because they just got a huge amount of rain in 24 hours, and we"ve already seen flooding within the refineries themselves, so we don"t know exactly how bad it"s going to be,” Andy Lipow, president of Lipow Oil Associates, told CNBC. “If it is bad, you"re looking at six to eight weeks of outages over in Beaumont-Port Arthur.”

Ultimately, that could mean that upstream oil producers will be unable to return to full production. Damage to pipelines, storage and processing facilities will also inhibit a full recovery. "It will be a while before operations can return to normal and the U.S. refining industry is bracing itself for an extended shutdown," Stephen Brennock of PVM wrote in a research note.

The prospect of lasting damage to the energy industry is sinking in. “Back to normal is months, not weeks, for exports and for the industry and the region. We have to acknowledge that,” Barclays analyst Michael Cohen wrote.

While much of the focus is (rightly) centered on the effect on gasoline supply, the refinery outages could eat into crude oil demand for quite some time. In fact, on balance, Goldman says that the supply outages could be outweighed by the destruction of demand. Houston alone accounts for around 750,000 bpd of oil demand. Goldman Sachs estimates the region will see demand fall by about 0.7 mb/d in the first month after the storm.

That will make “it harder for OPEC to rebalance the market and maintain bullish sentiment," Barclays" analysts said. OPEC has been struggling to drain inventories for almost a year, but without a substantial portion of U.S. refineries online, inland crude oil storage facilities in the U.S. could fill up once again. And the dip in demand could mean OPEC’s time horizon for balancing gets pushed out a bit more into the future, just as the cartel was hinting that it might have to extend its production cuts anyway.

But the problem is more complex because U.S. data will be much “noisier and less useful as a high frequency indicator at the very time OPEC needs it most,” Barclays says. Storage might increase, refinery runs will bounce around, production figures will edge up slowly – in short, the trend lines that the market has become accustomed to will be all out of whack. And because the U.S. offers the most transparent data, closest to real-time as one can get, it has an outsized impact on market psychology. The data will be really messy for weeks to come, which will complicate OPEC’s strategy.

Venezuela's Oil Production On The Brink Of Collapse

Authored by Nick Cunningham via OilPrice.com,

Desperation is spreading in Venezuela as violent protests continue to paralyze the country, further damaging the country’s shattered economy. Venezuela’s already-decrepit oil industry is deteriorating by the day, and an outright implosion is no longer out of the question.

The inflation rate, according to the IMF, will balloon to 720 percent this year. Food shortages have been common for quite some time, but are deepening and wearing down the population. Three out of four people surveyed by the WSJ reported involuntary weight loss last year. Hospitals have completely broken down.

Venezuela has been crippled by protests since late March, with more than three dozen people having been killed over the past two months, and there is no sign of improvement. This meltdown is taking a toll on Venezuela’s oil production, the last thing keeping the country from becoming a failed state. Venezuela’s oil production has been declining for more than a decade, mainly because oil revenues are used to finance the government, leaving little for state-owned PDVSA to reinvest in its operations.

But things are getting worse. The cash shortage is accelerating the decline. As of April, oil production stood at 1.956 million barrels per day (mb/d), down 10 percent from last year, and down more than 17 percent from 2015 levels - and output continues to trend downward. James Williams, energy economist at WTRG Economics, told Marketwatch in March that he expects Venezuela to lose another 200,000 to 300,000 bpd this year, another 10 to 15 percent decline from 1Q2017 levels.

The problem is downstream as well, as the shortage of refined products worsens. Three out of Venezuela’s four oil refineries are operating significantly below capacity because of the inability to find spare parts for maintenance, according to Reuters. The Paraguana Refining Center, for example, is only producing 409,000 bpd compared to its nameplate capacity of 955,000 bpd. PDVSA’s third largest refinery, which has a capacity of 187,000 bpd, is operating “at minimum levels due to problems at two of its three distillation units,” Reuters says.

With cash drying up, PDVSA is also struggling to import lighter fuels that are necessary to blend with the country’s heavy oil. Some ships are sitting off the Venezuelan coast because of unpaid bills. Meanwhile, because of obligations to creditors, PDVSA is sending crude abroad, leaving little for domestic refining.

But PDVSA’s financial and operational problems have a compounding effect. Falling production at refineries mean more gasoline needs to be imported from abroad, putting a tighter squeeze on state finances, which in turn leaves even less for everything else the country needs, from food to healthcare.

The possibility of all hell breaking loose is not zero. The WSJ reports that Venezuelan security forces are at their breaking point. Young, underpaid members of the national police are often not given food or water while on duty, and are asked to constantly beat back rapidly escalating protests in scorching heat, around the clock. Also, police and soldiers are not immune to the food shortages and economic collapse that the rest of the country is suffering through. The loyalty of the security services to the President no longer appears rock solid.

PDVSA and the national government avoided a debt default a few weeks ago, but with obligations looming later this year and a dwindling pile of cash with which to draw upon, the problem is not going away.

As far as the oil sector goes, the best case scenario for Venezuela is steady, if rapid, decline in production – a loss of 200,000 to 300,000 bpd this year. But the darker scenario is a much more sudden disruption if the country implodes. There is no way of knowing if this will happen, but analysts are growing increasingly concerned about the possibility. “Oil production continues its downward drift due to service provider cuts, power shortages, inability to obtain imports and irregular salary payments,” Helima Croft, commodities strategist at RBC Capital Markets, wrote in a recent report. “The oil question is whether current conditions could set the stage for the type of industrial action that cut exports by nearly 80 percent in the early 2000s.”