Market Overview

IHS Markit Hurricane Harvey Update (September, 1 2017)

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Crude Oil, Natural Gas, Refining and Chemical Sector Impacts

IHS
Markit
(NASDAQ:INFO), a world leader in critical information,
analytics and solutions, is releasing periodic updates on the impact of
Tropical Storm Harvey on the crude oil, refining and chemical sectors.

A summary of the latest update (as of end of day Thursday, August 31)
follows below.

The complete report is available at http://bit.ly/2epwEZA

Crude

  • Harvey-related logistical disruptions (especially to pipelines and
    ports) and refinery outages remain the most important factor impacting
    the local crude market.
  • International crude prices have been mostly range-bound since the
    storm (although Brent is up by a sharper $1.40 as of Thursday
    afternoon).
  • The widening of the Brent versus WTI Cushing price spread to nearly $6
    per barrel (up from $3.50 before the storm) is an indication that
    crude prices in the inland shale producing regions of the US are under
    downward pressure because of the logistical constraints cause by
    Harvey.
  • As of Thursday, US Gulf of Mexico operators have shut down
    approximately 236,000 b/d of crude oil output, equal to around 13
    percent of total Gulf of Mexico production. In addition, about 0.57
    Bcf/d of natural gas output was shut in, or about 18 percent of Gulf
    production.
  • There are no reports of damage to offshore platforms and the shut-ins
    appear to be mostly related to takeaway constraints, given the large
    volume of refining capacity that remains offline. The key limitation
    for producers remains takeaway capacity, given that most of
    Houston-area refineries are still offline or at reduced capacity.
  • The Texas Railroad Commission is estimating that as much as 500,000
    b/d of onshore Eagle Ford shale production (about a third of the
    play's output) was shut-in in response to the storm. However, a
    relatively quick recovery is now expected.
  • Resumption of normal activity levels at the port of Corpus Christi by
    next week should be a positive in terms of returning Eagle Ford wells
    to production. It should also facilitate resumed exports of US crude
    oil. US crude exports have averaged over 900,000 b/d year-to-date, and
    are almost entirely sourced out of the Gulf, with Corpus Christi
    handling about 250,000 b/d.
  • There have been no reports yet of a slowdown in Permian crude oil
    production, although crude storage in the field could become a
    limiting factor for operators if key pipelines to the Houston-area
    remain shut.
  • The US Department of Energy is preparing to release up to 1 million
    barrels from the Strategic Petroleum Reserve to supply the Phillips 66
    refinery at Lake Charles on an emergency basis. That refinery and the
    Citgo plant (the other major Lake Charles refinery) are partially
    supplied by pipelines that deliver light crude oil from Texas. Two of
    the pipelines that deliver crude from Texas to Louisiana refineries
    (Bayou Bridge Pipeline and Zydeco Pipeline) are reportedly down.

Refining

  • Hurricane Harvey thus represents by far the greatest ever disruption
    to US refining capacity.
  • Approximately 3.6 million b/d of refining capacity (better than 20% of
    the US total) is still offline, with a further 1.8 million b/d
    (approximately 10%) operating at reduced rates or otherwise affected.
  • The impact to supply is even greater if the more self-contained
    western regions of the country are excluded; specifically, nearly 38%
    of US capacity east of the Rockies has been disrupted by Harvey.
  • Given that some refineries have now been offline for a nearly a week,
    the effects of this disruption are beginning to propagate further
    downstream, with outbound pipelines (including the 2.6 million b/d
    Colonial system) unable to source product from the Houston area and
    fuel prices surging throughout the country.
  • The NYMEX RBOB spot price breached the $2.00/gallon mark during
    after-hours trading and, as of noon Thursday, had reached
    $2.15/gallon. Including today's gains, this key benchmark has now
    increased by 57 cents (around 36%) over the past ten days and it would
    not be surprising to see it rise further.
  • Wholesale and retail gasoline prices have already increased slightly,
    but will continue to rise as the impact of the spot price surge
    ripples down the value chain. The scale of these price increases will
    be most severe in the Gulf Coast, the Southeast, and the Mid-Atlantic,
    but such is the importance of the Texas refining industry that the
    entire country will be affected.

Natural Gas

  • In the natural gas market, demand reductions from both Hurricane
    Harvey and a broader cooling trend have more than offset the
    reductions in supply associated with the hurricane, with the result
    that prices have hardly moved.
  • According to OPIS/PointLogic daily tracking data, modeled wellhead
    natural gas production in the US Lower 48 was reduced by approximately
    1.9 Bcf per day during the hurricane period August 25-28, in
    comparison to the prior 4 days August 20-23 (Gulf of Mexico production
    began to decline August 24 as platforms were evacuated, so that day
    was affected by the hurricane). This impact was roughly evenly split
    between the state of Texas and the Gulf of Mexico.
  • The maximum daily production loss was on August 26, when the decline
    measured approximately 2.5% of US production, or 2.02 Bcf per day.
  • By contrast, power demand fell by approximately 7.6 Bcf per day in the
    US over the same period, with Texas contributing approximately 1.3 Bcf
    per day to that total reduction.
  • With an additional contribution from a reduction in residential and
    commercial demand, total US natural gas demand fell by approximately
    8.2 Bcf per day from August 20-23 to August 25-28. This reduction
    occurred as overall cooling degree days in the continental US declined
    from 11 to 7 over the continental US according to the NOAA.
  • Hurricane Harvey, and both its contribution to cooler weather and a
    broader cooling trend, have taken much more demand out of the natural
    gas market than supply.

Natural Gas Liquids (NGLs)

  • Based on company reports, IHS estimates about 45% of the total NGL
    fractionation capacity was potentially impacted because of Hurricane
    Harvey.
  • NGL operations at Mont Belvieu, Texas remain constrained due to
    Hurricane Harvey. As of August 28, four of the eight Enterprise
    Products Partners fractionators at Mont Belvieu, Texas were operating.
  • Targa's 493,000 b/d Cedar Bayou Fractionators (CBF) in Mont Belvieu,
    Texas were taken out of service on August 29. Targa also reported
    flooding of their brine disposal pumps at their Mont Belvieu terminal,
    which also affected facility's ability to receive NGL and may lead to
    additional supply disruptions in the near future.
  • Oneok's fractionation capacity was partially impacted and operating at
    reduced volumes primarily due to temporary outages and restraints from
    refinery and petrochemical customers.
  • Other major operators like Energy Transfer Partners (ETP), parent
    company of Lone Star NGL, stated minimal impact on their operations at
    Mont Belvieu.
  • Since Mont Belvieu is a major fractionation hub, impact on operations
    at Mont Belvieu also rippled through several upstream gas processing
    facilities due to reduced fractionation capacity availability.
  • DCP Midstream's five gas processing plants in Eastern portion of
    Permian Basin in Texas were shut down due to Hurricane Harvey related
    NGL transportation issues to the Gulf Coast. The total capacity of
    these gas plants is 160 MMcf/d. The plants will restart as soon as the
    fractionation capacity at Mont Belvieu, Texas or Sweeny, Texas becomes
    available.
  • A total of 845 MMcf/d of DCP's gas processing capacity in South
    Central Texas has been offline since August 25, and they are preparing
    to restart one of its 200 MMcf/d plant at reduced volumes.
  • Enterprise's six of eight natural gas processing plants were impacted.
    Their largest facility at Yoakum was operational.
  • Exports terminals were also affected by Hurricane Harvey and almost
    all waterborne NGL exports were brought to a halt. Phillips 66
    temporarily suspended operations on 25 August according to a notice on
    the company's website, owing to the port of Freeport's closure. IHS
    JOC states that, "Port Freeport's channel lost five to seven feed of
    draft, according to the local pilots' association. Maintenance
    dredging will be required to restore the channel to its 45-foot
    depth." The company also added that its "other assets in the Gulf
    Coast region continue to operate while implementing their hurricane
    preparation plans."
  • Operations at Enterprise's Morgan's Point terminal have been affected
    by the storm. The ethane terminal, capable of 200,000 b/d of exports,
    was put out of service.
  • Targa's Galena Park Marine Terminal is not in service because the
    Houston Ship Channel has been closed to ship traffic since 25 August.
  • Exports have been curtailed due to marine terminal shutdowns.
    According to preliminary data from the IHS Waterborne LPG Report,
    Hurricane Harvey has forced nearly 3.4 MMbbls off of the August export
    roster for the USGC, or the equivalent 6 VLGC liftings. If the barrels
    that are no longer leaving the USGC in August follow the same
    distribution of destinations as the liftings ytd, then 37%, 1.25
    MMbbls or about two VLGC cargoes, will not flow to the Far East that
    otherwise would have.
  • At the same time, Harvey has taken just over 1.5 MMbbls of ethane
    exports off the Morgan's Point export program for August, the
    equivalent of just under two VLEC cargoes. If the ethane cargoes
    followed the same distribution of destinations as the ytd liftings
    from MP, then 72% (just over 1 MMbbls) would have otherwise gone to
    India, with the balance destined for Northwest Europe.
  • Expectations for total LPG exports for the month of August have been
    reduced by slightly more than 140,000 b/d from 930,000 b/d prior to
    the storm to now at 790,000 b/d.
  • Ethane export expectations for the month of August have been reduced
    from approximately 150,000 b/d to 97,000 b/d.
  • NGL prices rose sharply globally after Hurricane Harvey made landfall
    as the market feared the impact on US fractionation and export
    capacity. After the Hurricane, concern within the NGL trading
    community around supply and inventory constraints quickly drove up the
    ratio of propane to crude from 66% on August 23 to 71% on August 30.
    As the market evaluates the impact on already low days of supply, the
    ratio may spike much higher as we approach the winter heating season.

Chemical

  • Ethylene – The amount of confirmed outages has increased, pushing the
    percentage of total US ethylene production offline to over 50% and
    total US ethylene consumption capacity to 32%. As of the time of this
    writing, no ethylene production units have been confirmed to be
    offline in Louisiana, although unconfirmed reports point to supply
    chain constraints and storage issues. Units are expected to begin
    restart procedures as soon as the storm passes, hopefully by week's
    end. However, it may take weeks for the overall ethylene market to
    approach pre-Hurricane production levels.
  • Propylene – The amount of confirmed propylene production assets
    offline has increased to 40% of the PGP/CGP and 28% of the RGP supply.
    Another 2% of PGP/CGP supply and 1% RGP supply is suspected down as
    well. Feedstocks to crackers and PDH may be compromised or limited
    which may curtail operational capability. Additionally, many of the
    derivative products are distributed by rail and marine and, as such,
    logistics have and will continue to be problematic. Derivative
    consumption of propylene has now reached 43% or relative parity to
    supply.
  • Polyethylene – Logistical constraints associated with trucks, rail,
    and ocean freight may be a more significant issue than actual damage
    to the physical plant sites and their respective production capacity.
    In anticipation of supply disruptions some major PE processors have
    already begun advising their customers to expect reduced shipments due
    to the referenced logistical constraints and as such the public could
    begin to see shortages develop in the next few weeks.
  • Polypropylene – Several polypropylene (PP) producers are expecting to
    have units back in production by early next week. At this time not a
    single plant is believed to have undergone significant damage which
    means that constraints to production are a result of either propylene
    monomer supply or critical, ancillary issues such as rail car and
    worker availability.
  • Benzene – Spot benzene prices continue to be volatile with prices
    surging higher with the announcement of additional supply outages and
    a Benzene Force Majeure (FM). The market balances however
    continue to quickly shift as some ports are preparing to reopen. A
    benzene FM from Tuesday night spurred some spot activity as
    participants were looking to cover their positions. However, this
    first Force Majeure could be short lived as the Freeport,
    Houston and Texas City ports are expected to slowly open today
    allowing some access to marine feedstock supply and product take away.
  • Toluene – Toluene prices continue to be pushed higher by gasoline. The
    reformate prices have surged to $2.35 per gallon and the IHS average
    blend values have topped $2.40 per gallon. The toluene price has
    firmed but not as quickly as gasoline. Chemical demand is hampered by
    derivative units also being taken offline, namely STDP and TDI units
    due to the storm. Solvent distribution has also ground to a halt.
    Product will begin to move again by the weekend but all logistics will
    be slowed.
  • Mixed Xylenes – Mixed xylenes prices are spiking along with gasoline
    prices. The blend values are now over $2.40 per gallon but that could
    prove to be a short term surge as prompt gasoline prices are driving
    the increase. On-spec mixed xylenes from Lake Charles could be in the
    spot market by next week and imports are thought to be loading from
    the EU to the U.S. right now. That will start to soften the mixed
    xylenes price as demand has also been tempered by PX units down in
    Baytown and Corpus Christi and a planned turnaround in Decatur
    expected to start in 10 days.
  • Para-xylene – The outlook for PX production at Texas City swung
    dramatically when Marathon decided to shut down refinery operations on
    Tuesday but quickly reversed course on Wednesday as the port was
    preparing to reopen. PX rates are reduced and are running on feedstock
    in inventory as is the refinery. The PX production in Corpus and
    Baytown continue to be impacted by the storm which is expected to lead
    to a multi-week loss in production.
  • Chlor Alkali/Vinyls – As of Thursday August 31, 25% of US PVC capacity
    remains offline due to the storm. The duration of the supply
    interruptions remains uncertain. OxyVinyls issued a Force Majeure declaration
    notice today on supply of PVC. With 43% of the US ethylene capacity
    currently out of service, ethylene availability via pipeline to
    Louisiana vinyls facilities could become an issue.
  • Methanol – At least one Texas based methanol unit has been confirmed
    shutdown by loss of power. Another two units are understood from
    market sources to have been shutdown due to a lack of logistics to
    move methanol or its derivatives out of the area. The storm has moved
    east and is not expected to impact production at the Beaumont facility
    due to the plant's elevation and the weakening strength of the storm.
    Spot methanol market activity has resumed for September with prices
    elevated by around $26 per metric ton (an 8.6% increase) over where
    they were prior to the storm.

The complete report is available at http://bit.ly/2epwEZA

About IHS Markit (www.ihsmarkit.com)

IHS Markit (NASDAQ:INFO) is a world leader in critical information,
analytics and solutions for the major industries and markets that drive
economies worldwide. The company delivers next-generation information,
analytics and solutions to customers in business, finance and
government, improving their operational efficiency and providing deep
insights that lead to well-informed, confident decisions. IHS Markit has
more than 50,000 key business and government customers, including 85
percent of the Fortune Global 500 and the world's leading financial
institutions. Headquartered in London, IHS Markit is committed to
sustainable, profitable growth.

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