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Texas Refinery Update

In last week’s column, I explained Why Harvey’s Impact At The Pump Could Be Significant. Since then, gasoline prices have surged across the country, and there have been numerous gasoline shortages across Texas. 

Today, I want to provide the latest update on the situation.

Before Hurricane Harvey, U.S. refineries were processing 17.7 million barrels per day (BPD) of crude oil. Refining capacity was running at 96.6% utilization. This extremely high utilization rate reflects growing U.S. demand for gasoline and increasing exports of finished products like gasoline, diesel, and jet fuel. 

Hurricane Harvey’s path swept right through the heart of the U.S. Gulf Coast refining complex. In just a few days, eighteen refineries were impacted, representing an estimated 30% of U.S. refining capacity. 

As I noted last week, the refineries around Corpus Christi probably wouldn’t be down for long. This week most of them are reportedly running back at normal rates. That’s primarily because this region didn’t experience the flooding associated with the storm around Houston. 

But the country’s two largest refineries — the Motiva Refinery in Port Arthur, Texas and the ExxonMobil (NYSE: XOM) refinery in Baytown, Texas both suffered damage from flooding. At press time, the Motiva Refinery was beginning initial startup procedures and hoped to have the plant at 40% capacity by the end of the weekend. ExxonMobil continues to make repairs, but thus far hasn’t provided a timeline for the Baytown refinery’s restart. 

The Department of Energy is issuing daily updates on the situation. They list capacity offline, and then capacity that is either restarting or running at reduced rates. They also report on oil production that was impacted by the storm.

Six refineries in the Gulf Coast region remain shut down. These refineries have a combined refining capacity of 1.7 million BPD, equal to 17.2% of total Gulf Coast refining capacity and 9.0% of total U.S. refining capacity.

Five refineries are in the process of restarting after being shut down. This process may take several days or even weeks, depending on whether any new damage is discovered. These refineries have a combined capacity of 1.6 million BPD, equal to 16.0% of total Gulf Coast refining capacity and 8.4% of total U.S. refining capacity. 

At least seven refineries in the Gulf Coast region were operating at reduced rates. These refineries have a combined total capacity of 1.7 million BPD, equal to 17.2% of total Gulf Coast refining capacity and 9.0% of total U.S. refining capacity.

Of critical importance to the South and the South Atlantic states, the Colonial Pipeline restarted Line 2 (distillate) between Houston and Lake Charles on September 4. Line 1 restarted on September 5 and began shipping gasoline from existing stocks in the Houston area. Line 1 provides gasoline for stations from Houston, Texas to Linden, New Jersey. 

Crude oil prices initially fell as a result of the refinery outages. This is because crude oil production was less impacted by the storm than was refinery capacity. Crude oil production in the Gulf of Mexico fell by ~400,000 BPD during the storm but has since recovered all but about 100,000 BPD. 

Oil production in the Eagle Ford, which was about 1.3 million BPD just before the storm, was impacted as well. Most major producers shut down or greatly reduced production, but it is quickly returning to normal. At press time, an estimated 200,000 BPD of production remains idled in the Eagle Ford. 

As the Texas refineries have come back online, crude oil prices have jumped. Since closing below $46/bbl on August 30th, the price of West Texas Intermediate has jumped by 7%. This increase will erode refining margins, which grew as a result of falling oil prices and rising gasoline prices. 

In turn, the refining sector itself surged as a result of the storm. Leading the pack were refiners like Andeavor (NYSE: ANDV) and HollyFrontier Corp (NYSE: HFC), neither of which have any Gulf Coast refineries.  

In my next article, I will address the issue of price gouging, which has been a hot topic over the past two weeks. 

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