US Oil and Gasoline Markets — Is the Worst Over?

The markets seem to be considering the worst outcome as they continue to wait for a better assessment of damage to the Gulf Coast energy infrastructure in the wake of this week's devastating hurricane. As such, it is likely prices can only go down with each piece of good news. Global Insight does not expect prices to go much higher than they have without another major supply disrupting event.

• Refinery flexibility is increasing as seasonal demand for gasoline falls after Labor Day. This could result in above historic seasonal levels of gasoline production from operating refineries.
• Imports could be a significant source of increased gasoline supplies, particularly since International Energy Agency (IEA) countries have announced that they will ship crude oil and refined products from their strategic stocks.
• There are indications that consumer and secondary gasoline inventories are rising out of concern over future supplies. These stocks will be quickly liquidated once the crisis has passed.
• Global Insight expects retail gasoline prices have already peaked or will peak shortly and then decline by the end of the year.

• The US government is releasing 900,000 bpd of crude oil on loan to refiners from the Strategic Petroleum Reserve, replacing much of the crude oil supplies that are off line from the US Gulf of Mexico production. 1.4 million bpd were reported off line right after the hurricane.
• The EPA fuel quality waiver will increase refinery and supply flexibility.
• The Jones Act waiver removes a water-borne shipping constraint.
• The IEA will release crude oil and refined products from their emergency supplies for shipment to the United States. This is significant because it potentially boosts imports of refined products from Europe to levels well above historic trade flows. This has the potential for more than offsetting the losses from refineries that are off line.

• Capline: This pipeline, which takes crude oil from the Gulf Coast to the mid-continent, is running again at 65% capacity. This is significant because the mid-continent crude oil inventory situation is unusually low for this time of the year.
• Colonial: Moves refined products to the US East Coast as far as New York from the Gulf Coast. Capacity is 2.3 million bpd. It is now at 38% and could be at 61% by end of day today and up to 86% by next week, and will move higher as power is restored to pumping stations. This is significant because there seem to be more reports of jet fuel and gasoline outages in the Southeast and mid-Atlantic markets than most other markets.
• Plantation: Moves products from the Gulf Coast as far as Washington, DC, with a capacity of 600,000 bpd. It is operating at 25% capacity.
• Dixie: Moves propane from Texas to North Carolina and Georgia and is at 40% of capacity.
• LOOP: Largest oil import terminal in the United States. It is coming back on line and will probably unload its first ship today. This is significant because the LOOP imported crude can be moved to nearly all the US Gulf Coast and mid-continent refiners. It has been moving 1.0 million bpd.

• Valero (St. Charles) Norco will be back up in two to three weeks.
• Chevron Pascagoula: Building a tent city to house workers because homes have been destroyed. Chevron built a dike around the refinery after Hurricane George in 1998. Chevron has stated that it protected the refinery from major damage. There is no word on when it will be operational. Chevron said the refinery was out of service for two months after Hurricane George because of flooding. This may be a good indicator of how long badly flooded capacity may be off line from Hurricane Katrina.
• Murphy has said that the damage is not as bad as initially feared at their Meraux refinery, but no word on a restart date.
• Marathon Garyville expects to restart this weekend.
• A total of eight refineries remain shutdown.

• Refiners typically take maintenance in the fall season. In the United States, the net effect is usually a reduction in gasoline production of about 200,000 to 300,000 bpd from August into September and October.
• Gasoline imports typically fall seasonally about 100,000 to 200,000 bpd (including blend components)
• Gasoline demand typically falls about 300,000 to 500,000 bpd in September from August levels, and may fall further depending on how consumers react to higher prices.
• Consumers and wholesalers have been trying to fill their tanks and keep them full out of fear that supplies will run out or prices will go higher. While this can be a self-fulfilling prophecy, it has an opposite effect later on. Once the crisis is perceived to have passed, gasoline demand and, possibly prices, will drop sharply as the inventory is liquidated.
• A supply/demand scenario:
  • If imports are held into September at summer levels, supply would increase over normal seasonal levels by about 200,000 bpd. Import levels will be much higher if IEA emergency stocks shipments arrive.
  • If refiners defer maintenance (at least some likely will be given these margins), refinery production would be 200,000 bpd higher than typical for September.
  • This is an increase of 400,000 bpd of supply, while demand falls 500,000 bpd.
  • Net change from today is in the range of 600,000 to 800,000 bpd of gasoline supply from August. This is close to the amount of production lost from the refineries knocked out by the hurricane.

• Most of the global factors that were driving prices higher prior to the hurricane continue to affect the markets.
• The Atlantic hurricane season is only half over and has not yet reached its peak.
• US refinery operating problems may have a much greater impact in the next few months due to the tighter refining balance.