Roundup: Houston Continues to Face Heavy Rain; Refinery Output Curtailed
August 28, 2017

Houston, Gulf Coast refining hub and fourth-most-populated city in the U.S., has been pounded by heavy rain for four days in a row, and more rain is expected over the next few days.

However, a meteorologist at a major bank expects that the city will see weather conditions begin to improve from Thursday onward, based on the latest storm path and weather forecast.

The heavy rain from Hurricane/Tropical Storm Harvey has caused widespread flooding, school and business closures, evacuations and power outages. A significant number of refineries, pipelines and terminals in the Corpus Christi and Houston areas have shut completely or cut operating rates as a safety precaution. As seen in past hurricane experiences, a prompt operational restart of logistics systems, if they are not damaged, is key to bringing resupplies to end-users in an efficient manner. So far, some Corpus Christi refineries affected by the storm appear to emerge intact, but in Houston, some logistics companies are dealing with flooding issues.

The disruption in oil refining and logistics has supported a price spike on NYMEX and the Gulf Coast cash markets on Monday, which in turn, pushed up rack prices across the country. The retail gasoline price in Houston is seen wide at about 60cts/gal, raising concerns about potential price gouging, but it is noted that rack prices have jumped significantly since last week.

On the oil processing front, eight refineries along the long Texas coastline were shut in the last few days -- some ahead of the storm and some since it came ashore -- with issues related to catastrophic flooding on the rise. Between shutdowns and run cuts, OPIS estimates 2.7 million b/d of processing capacity has been idled.

The state's major refining centers -- Corpus Christi, Houston/Galveston, and Beaumont/Port Arthur -- as well as the Lake Charles center in Louisiana, are seen likely to be affected in some way by Harvey.

In a worst-case scenario of all of the refineries in those regions shutting down, total refining capacity down would tally 5.928 million b/d, or 30.4% of total U.S. operating capacity.

Sluggish Midstream

In the midstream segment, operations at the crude and production pipeline logistics systems in the Houston area are sputtering due to the storm, refinery shutdowns and port closures.

Some products pipeline systems are operational, but there may not be products to ship. Also, shipments are expected to face more delays in the coming days. These operational issues could have knock-on effects on supply deliveries to destination markets in the Mid-Atlantic, Southeast, Midwest and Midcontinent.

Kinder Morgan's Houston-area oil products terminals and pipelines are operational, albeit low rates. Kinder Morgan's Pasadena terminal is not delivering products to Colonial Pipeline and Explorer Pipeline, but both pipelines could pick limited supplies from other origins outside of Houston. The continuous operations at Kinder Morgan was seen as a positive sign for a prompt resumption of normal service when the storm passes, but that may be contingent on a timely restart of other processing facilities outside of Kinder Morgan in that area.

Explorer Pipeline has a maximum capacity of 660,000 b/d for delivery to the Midwest and Midcontinent from Houston. So far, Explorer remains operational but at reduced rates. Shipments on Explorer are delayed by one day.

Colonial Pipeline is maintaining normal operations, but Cedar Bayou, outside of Houston, is affected by floods. Cedar Bayou operational suspension could have an impact on distillates deliveries. Colonial delivers up to 1.37 million b/d of gasoline and 1.1 million b/d of distillates from Houston to the Mid-Atlantic and Southeast. OPIS notes that delivery could also be slow on Colonial Pipeline due to a lack of products at Pasadena.

Magellan said that its terminals at Galena Park and East Houston have suspended operations.

Price Shock

Sharp NYMEX and spot gasoline price increases have jacked up unbranded prices at the racks in most parts of the U.S. as suppliers attempt to pass on higher supply costs to customers and end-users.

Some unbranded suppliers may opted to shut off their customers due to a risk of selling wholesale supplies at a loss due to rapidly rising NYMEX and spot prices, industry sources told OPIS on Monday. Some unbranded supplies might be cut off to protect the company's supplies to branded customers if pipeline supply gets disrupted, they said. In a tight supply situation, it is not uncommon to see an inverted branded-unbranded price relationship at the racks, with unbranded rising faster than branded.

On Monday, Valero has halted unbranded gasoline and diesel sales in several terminals across the U.S. Northeast until further notice, based on the company's note to unbranded customers obtained by OPIS.

Valero has shut off unbranded gasoline and diesel sales at almost 20 terminals in the Northeast, including Bridgeport and New Haven in Connecticut; Delaware City, Linden and Paulsboro in New Jersey; and several locations in New York and Pennsylvania, according to the company's notice. A Valero spokeswoman was not immediately available to comment at presstime.

In the Northeast, unbranded gasoline prices jumped by as much as 8-10 cts/gal late Sunday, and distillates prices rose by 4-6cts/gal.

NGL Angle

The heavy rain in Texas is expected to cause logistics and production issues for natural gas liquids (NGL), which could trigger price volatility.

Mont Belvieu, the NGL trading and storage hub in the U.S., is facing severe flooding. Mont Belvieu is located east of Houston, near Baytown on the Texas coast.

At the Mont Belvieu NGL complex, Enterprise said four of its eight NGL fractionators, three of its six propylene fractionators and its storage facilities are providing all or partial service. A statement from the company said the primary issues among the remaining Belvieu infrastructure have stemmed from high water and power outages.

Outside Mont Belvieu, only two of Enterprise's eight natural gas processing plants -- including its largest facility at Yoakum -- are in service. The remaining six, including the Shoup NGL fractionation facility, have suffered effects of the storm, including loss of power or third-party services, minor damage or a drop in natural gas production.

Besides Enterprise, ONEOK is also said to have shut its fractionators at Mont Belvieu.

Heavy rain in Texas will create storage and logistics problems for propane and butane at Mont Belvieu. The heavy rain is expected to dilute the brine pools at Mont Belvieu, and the brine will be of no use for NGL logistics, making cycling through caverns difficult if not impossible.

Butane, which could be used for gasoline blending in the winter, will be cycling out of caverns soon, but the brine pool issue is expected to prevent that from happening.

Also, production and logistics issues would slow down petrochemical exports on the Gulf Coast and the inflow of propane from the Midwest.

--OPIS Staff

Copyright, Oil Price Information Service

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