Hurricane Harvey has dominated my conversations with my Texas energy contacts Friday. According to the National Oceanic and Atmospheric Administration (NOAA), the storm is expected to make landfall on the middle Texas coast later tonight or early Saturday.
My friends in Texas are taking precautions, and one was even moving his cattle to a safer place on his ranch when we spoke this morning. I would note that the "weather-media complex" has hyped every storm since Katrina and been wrong about catastrophic predictions on almost every occasion. I hope they are wrong again this time, too.
A more sober view comes from the markets, and oil prices have moved very little as the Harvey story has been trending today. West Texas Intermediate crude prices are trading at $47.86 as of this writing, up $0.43 on the day.
Why are oil prices not reacting to Harvey? Well, first and foremost, Harvey's path has avoided most of the offshore production in the Gulf of Mexico. According to the U.S. government's Bureau of Safety and Environmental Enforcement, only 9.56% of Gulf of Mexico production had been shut-in as of yesterday. Also, the nearest area of energy exploitation, the Eagle Ford shale, is concentrated well inland, in counties like Webb, Dimmit, La Salle and Frio. So the heart of that play is west of San Antonio and stretches to the Rio Grande -- not the Gulf.
Some producers have suspended operations in the Eagle Ford out of an abundance of caution -- Platt's reports that Statoil (STO) , which operates two rigs in the Eagle Ford, is securing its rigs and wells and that ConocoPhillips (COP) has suspended drilling and completion activities in the Eagle Ford --but it is nowhere near a system-wide shutdown.
So, if Harvey does have a marked impact on the U.S. hydrocarbons industry, it will be on the chemicals production concentrated on the Gulf and also on refineries in Texas and Louisiana. The spread between crude oil and its refined products -- the crack spread -- has widened significantly over the past 24 hours and Platt's reported the following data:
- The NYMEX RBOB October crack spread was trading at $17.37/b early Friday, down from $17.59/b Thursday, but up from $15.31/b Monday.
- European gasoline prices were also higher. The front-month Eurobob gasoline crack swap was trading at around $14.45/b early Friday, up from $13.05/b Wednesday.
- Diesel prices also reacted as USGC ULSD Friday morning traded 50 points higher than Thursday's assessment.
- Valero Energy (VLO) began the shutdown of its two US Gulf Coast refineries in the path of Hurricane Harvey late Thursday, the 293,000 b/d Corpus Christi plant and the 89,000 b/d Three Rivers, Texas plant.
It surprises me that refined product prices are rising but crude prices are not reacting strongly even after another bullish reading (four fewer U.S. oil rigs in service this week) from this afternoon's Baker Hughes rig count data. If Harvey drives higher prices at the pump leading up to the Labor Day travel spike, it will really be more of a pain in the wallet than an investable event.
That said, the rig count is falling and so are inventories (down 3.3 million barrels in this week's U.S. Energy Information Administration (EIA) report) and those two factors should underpin crude prices. If it takes a natural disaster to get myopic oil traders to finally notice those bullish fundamentals, that would not be the first time market participants needed to be beaten over the head with a new data trend (the mortgage crisis comes to mind) before changing positions.
Best wishes to all in Texas in Louisiana, and I hope my friends there -- both human and bovine -- see as little impact as possible from Harvey.