Market Overview

IHS Markit Hurricane Harvey Update (September 6, 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 follows below (As of end of day September
5, 2017).

The complete report is available at http://bit.ly/2w7ozPG

Logistics

  • The port of Corpus Christi is open with apparently no restrictions
    since Occidental loaded a crude tanker in the port over the weekend.
    This port exports crude from both the Eagle Ford and Permian shale
    basins.
  • Freeport is open too and is the terminus of the Seaway pipeline that
    brings crude from Cushing. However, it is unclear if draft
    restrictions have yet been eliminated.
  • Around the Houston area the story is not as clear cut. Our
    understanding is that Beaumont and Port Arthur were for the most part
    closed as of September 4. Apparently the Coast Guard is allowing some
    barge traffic into Port Arthur and may consider allowing ships to
    enter starting today.
  • The Coast Guard announced last Friday the Galveston Bay entrance
    channel, outer bar channel, inner bar channel, bolivar roads
    anchorages, bolivar roads channel and Galveston harbor are open. It
    also stated that the Texas City channel, Texas City turning basin and
    industrial canal are also open.
  • The Houston ship channel is open but with restrictions. Ships up to 40
    foot draft are allowed up to around the ExxonMobil refinery at Baytown
    compared to a normal draft of 45 feet. And in the upper reaches of the
    channel only barge traffic is allowed. As ships are allowed in and
    experience no difficulty in navigating the Coast Guard will gradually
    allow larger ships into the channel.
  • Trucking activity in the Houston area remains disrupted by flooding,
    and costs for chemical and plastics shippers looking to secure truck
    capacity and move backlogged freight will rise.
  • Relief efforts are claiming truck capacity that would otherwise be
    dedicated to commercial and industrial shippers. Inbound rates to
    Houston are rising by double digits on spot market load boards.
    Trucking services are likely to remain disrupted for several months,
    not weeks. Truck rates will rise most significantly locally, but also
    nationwide.

Crude

  • As of Tuesday, the volume of Gulf of Mexico crude oil production
    shut-in had declined to about 121,000 b/d (equal to around 7 percent
    of total Gulf production).
  • Natural gas production shut-in has now declined to about 0.26 Bcf/d
    (about 8 percent of Gulf production). Some production remains offline
    because of ongoing takeaway constraints.
  • In the onshore segment, key Eagle Ford operators are reporting a quick
    ramp up in production, and are nearing pre-storm levels. There are
    still no reports of damage to crude-producing operations, and
    companies are returning personnel to complete inspections and resume
    operations. These are key signposts that production will continue to
    recover in the days ahead.
  • Key ports and pipeline systems are re-opening, which will alleviate
    logistical bottlenecks that had threatened to further weaken inland
    crude prices.
  • Occidental Petroleum's Corpus Christi export terminal shipped its
    first crude cargo since the storm over the weekend.
  • Corpus Christi is a critical destination for both consumption and
    export of Permian and Eagle Ford crude.
  • Magellan's Longhorn and Bridgetex pipelines (which deliver crude from
    the Permian Basin to the Houston area) re-started on Friday, as did
    the company's crude distribution system in Houston.

Refining

  • The Labor Day weekend brought nothing but good news for the U.S.
    refining sector.
  • At least two of the 20 affected refineries (Valero's Corpus Christi
    and Texas City plants) were officially at "normal" run rates
    yesterday, with several others projected to join them in the next 48
    hours.
  • Only five Gulf Coast refineries were neither operational nor actively
    starting up as of Monday September 4 – and four of these are expected
    to begin that process this week.
  • The amount of crude distillation capacity offline as of September 5
    (including IHS Markit estimates of refineries operating below normal
    rates) is about 3.4 million b/d, or approximately 19 percent of the
    U.S. total. This is down from upwards of 25 percent late last week and
    IHS Markit expects this fraction to decline to less than 10 percent by
    this weekend.
  • Meanwhile, the Magellan and Explorer Pipeline systems (two of
    Houston's three primary outbound product pipelines) both resumed
    operations over the weekend.
  • Colonial Pipeline, the third outbound system and by far the largest in
    the country, resumed deliveries along its distillate line yesterday
    and plans to restart its gasoline line today.
  • In the meantime, tanker shipments from Europe have also surged over
    the past week as the broader Atlantic Basin refining system reacts.
  • Questions still remain about the status of a few key Gulf Coast
    refineries, but the recent positive developments have certainly
    tempered market fears of a gasoline supply crunch.
  • Spot gasoline prices are declining and the growth in retail prices has
    slowed dramatically. To be sure, even if a few refineries do remain
    offline for several weeks, the U.S. and the broader Atlantic Basin
    refining system should have no issues meeting demand.
  • All this said, the potential exists for continued tightness (or even
    shortfall) in some markets given that Hurricane Irma is currently
    bearing down on Florida. That state's gasoline supplies were
    effectively cut off by Harvey and are unlikely to get replenished
    before Hurricane Irma disrupts shipping routes. Much will depend on
    how Irma evolves, but Florida is certainly the most vulnerable market
    at this point.

Natural Gas

  • Demand weakness continues across the U.S., and one component, LNG
    exports, lingers as the most significant remaining effect of Hurricane
    Harvey.
  • LNG exports through the Sabine Pass terminal are expected to average
    only 0.4 Bcf/d for the first 5 days of September, according to
    Opis/PointLogic tracking data, while for the last 5 days of August,
    including the landfall and direct aftermath of Harvey, exports
    averaged 1.6 Bcf/d.
  • Sabine Pass has not had a ship off take gas since August 24, and
    on-site storage is becoming an issue. Hurricane Harvey has reduced
    ship traffic in and around the Port Arthur, Texas area.
  • Without the steady off take from ships in the Gulf, Sabine Pass is
    constrained in its ability to take in gas from the grid and liquefy
    it. As a result, a bottlenck is forming that has impacted gas
    delivered to facility from Creole Trail, Transco Pipeline and NGPL.
  • NGPL further confirmed a force majeure on its system, which began on
    August 28, due to limited access in the region due to Hurricane
    Harvey, and flows to the facility from the pipeline have been zero
    since that date.
  • Mexican exports are back over 4.0 Bcf/d after falling below 3.6 Bcf/d
    during Hurricane Harvey. Canadian net imports have been steady at 5.5
    Bcf/d over the past two weeks.
  • As a result of the slowdown in LNG exports, the lower 48 U.S. has been
    a net importer of natural gas over the past 6 days, by an average of
    1.0 Bcf/d.

Natural Gas Liquids (NGLs)

  • As of September 5, NGL operations at Mont Belvieu, Texas and the
    Permian Basin are returning to normal quickly.
  • Enterprise Products Partners said on Tuesday that it has restored
    service at substantially all of its major assets impacted by Hurricane
    Harvey.
  • Enterprise's marine terminals have largely returned to service, as
    port restrictions remain in place at certain facilities, the company
    said. Enterprise's two marine terminals on the Houston Ship Channel
    have resumed commercial service as loadings of ethane and LPG ships
    have resumed. In South Texas, the partnership's eight natural gas
    processing plants and two NGL fractionators have resumed full
    operations.
  • In addition, Enterprise's NGL pipelines in South Texas are in
    commercial service. With respect to pipeline operations, issues have
    been minimal and have not prevented movements on Enterprise's
    mainlines. Operationally, the partnership continues to face challenges
    resulting from curtailments or allocations by some critical third
    party service providers.
  • DCP Midstream said late Thursday last week that it was in the process
    of restarting several of its Permian Basin gas plants that had been
    previously curtailed due to third-party pipeline and fractionation
    constraints. Two plants remained shut in.
  • In other operations, DCP said it restarted a 200 million cubic feet
    per day (MMcf/d) gas plant in the Eagle Ford area Thursday, though at
    reduced volumes. Four additional plants with 645 MMcf/d of capacity
    remained shut in.
  • DCP's Sand Hills, Southern Hills and other NGL pipelines into the Gulf
    Coast "have continued to operate and remain fully operational," DCP
    said.
  • Earlier in the week, DCP reported that five Permian-based gas plants,
    representing 160 MMcf/d of gas, had been taken offline and that around
    845 MMcf/d of South Central Texas capacity was down as an indirect
    result of the storm in the Gulf.
  • NGL production from refineries is also quickly returning to normal as
    those hit in the South Texas and Houston area are returning to normal
    operations.
  • The return of supply and export terminal capacity to begin the week
    after the Labor Day holiday has had global implications on NGL
    pricing. LPG prices started the week after the Labor Day holiday
    weaker with the propane to crude ratio falling from 72 to 70 percent.
  • Additionally, the Japanese to Mont Belvieu propane differential fell
    from levels in the $90's to the $80's to begin the week as export
    terminals return to normal operations.

Chemical

  • Ethylene – The amount of confirmed outages has increased, pushing the
    percentage of total U.S. ethylene production offline to 54 percent and
    total U.S. ethylene consumption capacity to 36 percent. The Evangeline
    line, which connects Texas to the Louisiana, Choctaw ethylene
    distribution, is vital for transport of ethylene from Texas to
    Louisiana; thus far, the pipeline appears to be undamaged.
  • Propylene – The amount of confirmed propylene production assets
    offline remains at 41 percent of the PGP/CGP and 33 percent of the RGP
    supply with another 15 percent of PGP/CGP supply and 3 percent RGP
    supply at reduced rates. Feedstocks to crackers and PDH had been
    affected due to issues predominantly at Enterprise's Mont Belvieu but
    are seemingly resolved as all of the fractionators at the site are now
    operational.
  • Polyethylene – While the initial impact was associated with
    constraints to current production capacity and on contract and spot
    prices, we also expect to see additional delays develop with regard to
    the new production capacity previously scheduled to start up during
    the third and fourth quarters of this year. PE producers associated
    with four major projects totaling about 3.6 MMT were in the final
    stages of startup prior to the storm.
  • Polypropylene – The market seems to be more upbeat to start the week
    on the hopes of a fast recovery by most affected resin producers.
    Initial reports on allocation levels to regular, prime buyers from
    several suppliers indicate supply levels ranging from 70 to 100
    percent for the month of September.
  • Benzene – On Monday, it is understood that the large ExxonMobil
    Baytown refinery was entering into a restart. Additionally, Marathon
    Galveston Bay is ramping up rates after narrowly avoiding a shutdown.
    That should put the market at ease as each refinery accounts for
    nearly 10 percent of U.S. benzene capacity. The force majeure
    announcements sent out last week remain in place as producers
    determine the total impact to production. Refineries in the Beaumont
    and Port Arthur area continue to be impacted with production offline
    and the market remains tight as derivative units restart and look for
    available benzene. The benzene price has increased by about $0.10 -
    $0.15 per gallon from just prior to the storm.
  • Chlor Alkali/Vinyls – The market in coastal Texas continues to make
    progress recovering from the hurricane and subsequent flooding, but
    product availability is still limited. Operating rates are reported to
    be slowly rising at plants that remained on stream at reduced capacity
    during the storm. Rail operations are improved, but cannot yet be
    considered to be normal. With respect to vinyls, Westlake has
    announced a price increase on PVC of 5 cpp for October domestic
    contracts, following the earlier move from OxyVinyls last week.
  • Methanol – Little has changed for methanol at this point as work
    continues to restart units as well as await clearance from the ports
    and rail roads. Thus far we know that at least one Texas based
    methanol unit tripped during the flooding and is restarting while 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. Spot methanol market activity has resumed for September with
    prices elevated by around $26 per metric ton (an 8.6 percent increase)
    over where they were prior to the storm.

The complete report is available at http://bit.ly/2w7ozPG

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.

IHS Markit is a registered trademark of IHS Markit Ltd and/or its
affiliates. All other company and product names may be trademarks of
their respective owners © 2017 IHS Markit Ltd. All rights reserved.

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