The Week Harvey Ravaged the Gulf Coast Refining Center

Fuel Marketer Intelligence: Supply Chain Dynamics to Retail Fuel Prices.

By Brian Milne

 “It’s a mess down here,” an exasperated fuel distributor in Houston said a day following Harvey’s second landfall as a tropical storm in Louisiana near the Texas border, as he struggled to find fuel at the rack. “Can’t get any product,” he said, after contacting several suppliers.

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At the time, a moment of extraordinary uncertainty as floodwaters covered a third of Harris County’s 1,777 square miles, the scene played out all over the region. The one in a 1,000 year event had run through the heart of the oil industry, at one point knocking offline more than 4.0 million bpd of crude processing capacity while some refineries not offline were operating at reduced rates.

There are 29 operating refineries in Texas with a crude processing capacity of nearly 6.0 million bpd, according to the Energy Information Administration, which represents 30.7% of total U.S. refining capacity.

Major refining centers in Corpus Christi, Houston, Beaumont and Port Arthur were struck by Harvey, with Harvey making initial landfall Aug. 25 as a category 4 hurricane just east of Corpus Christi. Harvey dropped more than 40 inches of rain on Houston, 52 inches at Cedar Bayou in the Houston area, and after lingering in the Gulf of Mexico, made a second landfall as a tropical storm in Louisiana near the border with Texas on Aug. 30. Refineries in Beaumont and Port Arthur were slammed by the deluge of rain, with Harvey wreaking havoc on four refining centers along the Texas coastline.

Flooded right-of-ways, power outages and, primarily, a lack of fuel to ship idled the Magellan and Explorer pipelines in Houston, and limited the flow rates on the Colonial Pipeline, which could not source supply at its Houston-area and Hebert origin points in Texas. The Magellan and Explorer pipelines transport fuel to local markets in the Midwest, and the Colonial to the Southeast and Northeast, ending in the New York Harbor at Linden, New Jersey.

From a market perspective, the extreme operational challenges peaked Aug. 30 and 31, when offline refining capacity, closed ports and shut or partially shut pipelines spurred fear of extended gasoline shortages. Suppliers at terminals in the Southeast north to the Mid-Atlantic and in the Midwest were reporting product outages and restricting customer allocations.

The timing collided with the expiration of the September RBOB gasoline futures contract on the New York Mercantile Exchange, which would spike to a more than two-year high on the spot continuous chart at $2.1705 gallon before expiring at $2.1399 gallon, up 25.5cts during the session. Consider on Aug. 17 the contract traded at a $1.5374 gallon one-month low, equating to a 63.31cts trade range for August.

The extended surge in gasoline futures values was chiefly sparked by end of month reconciliations. In industry terms, a short squeeze powered the gasoline contract well past $2 gallon to the high.

The federal government, in coordination with states, was already in action, with the Environmental Protection Agency waiving summer gasoline’s Reid vapor pressure ratings for 38 states and the District of Columbia through Sept. 15, effectively ending the low RVP season. The action was to provide the greatest degree of flexibility in sourcing supply.

Late on Aug. 30, crude oil from the Strategic Petroleum Reserve was already flowing to Phillips 66’s Lake Charles refinery, with a lack of feedstock limiting product yield at the plant. By early Sept. 1, the Department of Energy had confirmed that it had approved the release of 4.5 million bbl of crude from the SPR to three refiners–Phillips 66, Marathon Petroleum, and Valero Energy.

With Colonial operations “at the mercy of the suppliers,” as one representative explained the situation, replenishing depleted crude tanks due to pipeline shutdowns and port closures was a critical step in mitigating greater supply outages, especially in the Southeast. Colonial Pipeline was only operating its pipeline from Lake Charles east, and at reduced rates, with the flow of product taking longer than usual to reach destination points.

There are 26 refineries connected to the Colonial Pipeline, with 13 of those refineries located between Houston and Lake Charles. As of Sept. 3, Colonial was targeting Sept. 4 for restarting its 1.056 million bpd main distillate line between Houston and Hebert and Sept. 5 for its main 1.272 million bpd gasoline pipeline.

Over the coming weeks, the market will find out more on the destruction that Harvey caused the industry. There may be some refineries that are down for weeks or longer. By Sept. 1 however, returning operations at the ports of Corpus Christi and Houston, the restart of Magellan’s products pipeline from Texas City to Houston, and restarting refineries offered respite for the industry. Corpus Christi’s four refineries, with a capacity of 805,000 bpd were returning operations, while Lake Charles three refineries, combined capacity of 750,000 bpd, were ramping up runs.

Gasoline imports are expected to surge, with reports tankers from Rotterdam were already headed west across the Atlantic. Suppliers were also shipping supply south along the eastern seaboard from the New York Harbor.

Analysts note there was nearly 230 million bbl of domestic gasoline supply as of Aug. 25 according to the EIA, reflecting nearly 24 days of forward supply cover. The International Energy Agency said they were monitoring the storm’s effect from Harvey, but saw no evidence that a coordinated international release of oil stocks was needed.

“There are high levels of stocks in the affected regions and in the United States as a whole. These stocks are being supplemented by imports of gasoline to the East Coast of the United States and the US Secretary of Energy has taken action to ease localised crude-oil shortages in Texas, by providing crude-oil loans from the US Strategic Petroleum Reserve,” said IEA.

On Sept. 1, NYMEX October RBOB gasoline futures, the futures contract now nearest to physical delivery, settled at $1.7479 gallon, down 39.2cts on the session from the expired September contract. Retail prices will continue to advance over the next several weeks, but a resilient industry and appropriate action by the federal government already has the world’s most important refining center on the road to recovery.