September arrives in the aftermath of the historic flooding in Houston left behind by Hurricane Harvey. This month’s market watch looks at the record-setting hurricane’s impact on oil refineries and their operations even as Hurricane Irma — a potentially even more devastating hurricane — makes its first landfall in the Caribbean. In addition to the energy-related effects of this natural disaster, this edition also covers the potential market impacts of International Peace Day, the Autumnal Equinox, and OPEC’s meeting later this month.
September 13 – EIA Petroleum Status Report
Hurricane Harvey has directly impacted crude and product fundamentals more than virtually any other aspect of the economy. That’s largely due to the significant concentration of refinery operations in and around Houston. At the peak, estimates suggested nearly 4.5 million barrels per day of refining capacity was offline – a number that equates to roughly 25% of total US operations and 5% of global refining power.
In the initial aftermath, those outages caused gasoline and diesel prices to surge, while the lack of refinery demand actually caused oil prices to fall. That general trading pattern makes sense, but it’s difficult to quantify the exact impact in the initial aftermath. That effort should become a bit clearer later this month as EIA (Energy Information Administration) provides the usual weekly round of inventory numbers. The report on the 13th should give the clearest picture yet of Harvey’s actual supply impact.
September 21 – International Peace Day
Established by the United Nations in 1981, International Peace Day doesn’t directly impact energy markets any more than it guarantees conditions of world peace. It does, however, offer an opportunity for reflection. Around the world, energy is almost always inextricable from geopolitical conflict. Today’s oil market often trades based off of tensions in countries such as Venezuela, Libya, and Nigeria.
In the world of natural gas, European relations with Russia have complicated plans to increase Russia’s capacity to export gas to Germany and other European markets. This arose in response to Russia’s annexation of Crimea. Most recently, US/North Korea tension has triggered a rise in overall market volatility. (Reduced risk appetite typically proves bearish for energy commodities.) Conflicts might move the market change over time, but the risk that geopolitical conflict presents for energy markets isn’t going away anytime soon.
September 22 – Autumnal Equinox
For most, the autumnal equinox is nothing more than the official end of summer and the start of fall. For the natural gas market, though, it takes on a bit more importance as it signals a final stretch for US natural gas producers to send more gas into storage ahead of the winter heating demand surge. In recent years, storage levels have been especially high heading into the winter withdrawal season. These levels play a major role in capping natural gas prices while also adding pressure to electricity prices in most regions.
This year, inventories have been pulled back in line with seasonal averages as more gas has instead been exported to foreign markets through pipelines and LNG (Liquid Natural Gas) tankers. The current market is far from undersupplied, but it does suggest that strong builds during the first few weeks of fall will be important if the market hopes to limit price upside ahead of the winter transition.
September 22 – OPEC Committee Meeting
Amid its ongoing production deal, OPEC (Organization of the Petroleum Exporting Countries) has a number of meetings, most of which come and go without too much market impact. The problem OPEC has faced of late is that its lack of market impact has come to characterize its entire production deal. As such, benchmark oil prices still trade near their relatively low pre-deal levels as US shale has boosted output to counter OPEC’s cuts. That’s left OPEC in a bit of a quandary:
- If it cuts production further it may allow US shale producers to seize greater market share.
- If it boosts output to force shale back out, it risks crashing market prices and squeezing national budgets even further.
Given the relatively low appeal of those two primary paths, it makes sense that OPEC has decided to use its September meeting to bring in option C: convincing Nigeria and Libya to start pulling their weight.
Since the deal was first approved, Libya and Nigeria were exempt from any cut requirements as conflict in those countries had already limited output. In recent months, however, both countries (particularly Libya) have enjoyed a resurgence in total production figures with Libya’s gains offsetting a large portion of OPEC cuts. That has Saudi Arabia and others eager to bring the countries under the deal’s umbrella despite continued risk of conflict and disruptions.
If all goes according to plan, September’s meeting will result in every OPEC member working under a defined production cap for the first time since the current deal went into effect. This would be a bullish development for crude and product prices.