Crude Oil Price Analysis for August 29, 2017

Crude oil prices tumbled on Monday declining by nearly 2.5%, as Hurricane Harvey, dumped records amount of rain into the Houston area, all-but halting refinery operations in the Texas area.  The gulf coast near Houston Texas is the largest producer of Jet fuel in the United States, and the lack of refinery operations is putting downward pressure on oil prices. This is somewhat offset by the large rally in gasoline prices which have increased due to the lack of production of products.

Technicals

Crude oil prices broke down through support levels generated by an upward sloping trend line that connects the lows in July to the lows in August and comes in near 47.20.  This is seen as short term resistance. Target support on crude oil prices is seen near the July lows at 44 per barrel. Additional resistance is seen near the 10-day moving average at 47.62. Additional resistance is seen near a downward sloping trend line that comes in near 49.50. Negative momentum has reaccelerated, as the MACD (moving average convergence divergence) histogram prints in the red with a downward sloping trajectory which points to lower prices for crude oil. The relative strength index (RSI), which is a momentum oscillator that measures accelerating and decelerating momentum,  moved lower with price action, reflecting accelerating negative momentum.

Hurricane Harvey Wreaks Havoc

Hurricane Harvey pummeled the Gulf coast of Texas, making landfall as a category 4-storm. The 130 mile winds generated extreme damage in on the coast of Texas, but the real damage is the rain that is falling in Houston. 25 inches of rain has already dropped in Houston, and another 20 inches is expected. The refineries have abandoned ship, taking offline nearly 30% of the product produced in the United States. The lack of product production is reducing the amount of oil that is needed, which has put downward pressure on crude oil prices.

Gasoline Surges to Two Year High

Gasoline prices hit two-year highs after Hurricane Harvey. According to an S&P Platts report, around 2.2 million barrels per day in refining capacity was shut down or in the process of being shut down as of Monday morning. Refineries in the Corpus Christi area had shut down ahead of the storm, but those in the Houston area only began shutting down yesterday, prompted by the floods that Harvey brought.

Among the plants being shut down was Exxon’s 560,500-barrel per day facility in Baytown, which is the second-largest oil refinery in the U.S. after Port Arthur. Shell also started shutting down its Deer Park facility, which has a capacity of 340,000 barrels per day, and Phillips 66 started the shutdown of a 247,000-bpd refinery in Sweeney. Texas houses some 4.944 million barrels per day in refining capacity.

Hurricane Harvey has also disrupted imports and exports of oil and oil products, with both Corpus Christi and Houston ports closed. EIA data for May shows that Texas imported 1.9 million bpd of the total 3 million bpd that entered the U.S. via the Gulf Coast, as well as 418,000 barrels per day of refined petroleum products.

Less Oil From Libya

Sharara stopped pumping oil a week ago, after a militant group seized control of the pipeline that feeds crude from it to the Zawiya export terminal, and is still idle, a person familiar with the situation. In addition to 270,000-barrel per day Sharara, El Feel, which pumped over 26,000 bpd in April, has also stopped production, a source from the Petroleum Facilities Guard that controls security at the field. The National Oil Corporation has declared force majeure for the field, and for another one as well, the Hamada, said a spokesman for Arabia Gulf Oil Co, due to a blockade on the pipelines carrying oil from the two fields.

The output suspension is the latest in a string of earlier ones, most focused on Sharara, which supplied around a quarter of Libya’s total, 1.02 million bpd as of July, before production started gradually being reduced after two vehicle thefts that led to a tightening of security measures at the field including limiting access of personnel to some parts of the field.