Record summer heat in US, hurricanes could send fuel prices plummeting as refiners sweat – 07/08/2024 at 12:00

Record summer heat in US, hurricanes could send fuel prices plummeting as refiners sweat – 07/08/2024 at 12:00
Record summer heat in US, hurricanes could send fuel prices plummeting as refiners sweat – 07/08/2024 at 12:00

((Automated translation by Reuters, please see disclaimer https://bit.ly/rtrsauto)) by Shariq Khan and Nicole Jao

A twin wave of record heat and hurricanes is expected to test the resilience of U.S. refiners in the coming weeks, raising the risk of extreme volatility in fuel prices in the midst of the peak travel season, analysts said.

The Atlantic hurricane season, which runs from June to November, poses an annual threat to U.S. refineries. Half of the country’s refining capacity, more than 18 million barrels per day, is located along the Gulf Coast, which is highly exposed to tropical storms. The United States is the world’s largest fuel market.

This year, refiners may have to deal with more storms than usual. Government forecasters expect as many as seven major hurricanes in the coming months, double the annual average of three major Atlantic hurricanes with winds of more than 111 miles per hour.

Citgo Petroleum Corp. cut production at its Corpus Christi refinery to 165,000 barrels per day on Saturday and plans to run the facility at a minimum as Tropical Storm Beryl () passes over the Texas coast, sources said.

Texas’ largest ports have also shut down operations and shipping traffic in anticipation of Beryl, which is expected to strengthen into a hurricane before hitting the region early Monday.

The intensity and timing of Beryl, which became the earliest Category 5 hurricane on record (), point to an active and disrupted season, said Neil Crosby, crude market analyst at Sparta Commodities.

“Hurricanes remain the biggest wild card for gasoline prices,” said Patrick De Haan, an analyst at GasBuddy. “There’s no better reminder of that than Beryl,” he added.

Evacuation orders ahead of storms can cause inventory to build and boost demand for fuel, leading to higher prices for gasoline, diesel and other refined products, De Haan said.

If a major storm hits the Gulf Coast refining system, it could reduce fuel supplies by up to a million barrels per day and lead to extended shutdowns or even permanent closures, according to the U.S. Energy Information Administration (EIA).

Hurricanes heading toward the Gulf Coast could also reduce crude supplies by similar amounts, with the offshore Gulf of Mexico region home to about 14% of U.S. crude production.

In 2021, U.S. oil and gas companies suspended production of more than 1.7 million barrels of oil in the wake of Hurricane Ida.

The shutdown of about 1.5 million bpd of crude production and refining capacity could push gasoline prices up 25 to 30 cents, according to the EIA.

WARMER WEATHER

In addition to hurricanes, refineries are facing more problems this year from scorching heat.

The latest monthly U.S. temperature report predicts above-average temperatures across much of the United States in July, which is typically the warmest month.

Excessive temperatures have significant impacts on commodity supply chains, including oil and fuel, JPMorgan analysts wrote last month.

Most refineries are designed to operate between 32 and 95 degrees Fahrenheit. Triple-digit temperatures could cause equipment malfunctions and reduced refining capacity.

Last year, extreme heat caused a 500,000 bpd reduction in refined product production on the Gulf Coast, JPM analysts wrote.

Similar effects are being felt this year. Unit outages reported by Phillips 66 PSX.N at its Wood River, Illinois, refinery last month were likely due to heat waves, according to Kloza and other industry experts.

MONEY AT YOUR FINGERTIPS

An intense maintenance season earlier this year allowed U.S. refineries to undertake major upgrades and perform detailed maintenance work that had been repeatedly postponed due to increased post-pandemic demand and supply disruptions.

In theory, that should help refineries be better prepared for hurricane season, said Alex Hodes, an oil analyst at brokerage firm StoneX.

The slowdown in demand in recent months has also helped refineries build up fuel inventories, which should serve as a buffer in the event of a breakdown.

U.S. gasoline inventories have increased by about 4 million barrels since the beginning of April to nearly 231.7 million barrels as of June 28, in line with the seasonal average for the past five years, excluding 2020.

Distillate inventories, including diesel and heating oil, have increased by 3.7 million barrels since the beginning of April and stood at 119.7 million barrels as of June 28, slightly below the historical average excluding 2020, when inventories were sharply boosted by COVID-related demand destruction.

“There’s not a lot of margin for error,” said Tom Kloza, head of energy analysis at the Oil Price Information Service. “I’m waiting to see what happens.”

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