Oil Price Fundamental Daily Forecast – How Long Will Refineries Be Shut Down?

With almost a quarter of U.S. refineries shut down due to Hurricane Harvey, U.S. West Texas Intermediate and international-benchmark Brent crude oil prices retreated again on Wednesday while U.S. gasoline prices rose to $2.00 per gallon for the first time since 2015.

October WTI crude oil settled at $45.96, down $0.48 or -1.03% and November Brent crude oil finished at $50.73, down $0.93 or -1.80%.

According to industry estimates, at least 4.4 million barrels per day (bpd) of refining capacity was offline, or almost a quarter of total U.S. capacity. Prices continue to decline as U.S. crude inventories continued to increase at a rate of about 1.4 million bpd. At the same time, a gasoline supply squeeze triggered a jump in gasoline prices.

Traders also reacted to reports that it could take several months before all production could be brought back online.

In other news, according to the U.S. Energy Information Administration, U.S. commercial crude oil stocks fell by 5.39 million barrels last week, to 457.77 million barrels the week-ending August 25. The report also showed U.S. gasoline demand jumped to 9.846 million bpd last week as U.S. refining utilization rates rose to 96.6 percent, the highest percentage since August of 2015.

However, it should be noted that the EIA data was collected before Hurricane Harvey hit the Gulf Coast.

Forecast

We know the fundamentals are bearish but we have to warn that technical factors could come into play at any time, triggering wicked short-covering rallies. This is because not everyone is looking for a “home run” trade, some traders prefer short-term gains.

You may have also noticed that volatility has slowed in the market. The lack of fresh news and uncertainty over the flood damage may be causing this. Traders have priced in refinery shutdowns. Now I think they are waiting to find out how long they will be shut down and to what capacity. For example, will the shutdown last days, weeks, or months? And if the refineries do come back on line, will they be producing at 25%, 50% or 100%. These types of answers will determine the price action.

Goldman Sachs said it could take months before all production could be brought back online. They also said that based on damage from previous hurricanes that perhaps 10 percent of the currently offline capacity could remain unavailable for several month.

So at this time, the market remains bearish, but once a timeline is established for the refineries to come back on line, expect a more volatile trade.

The daily October WTI chart indicates that the key number is $45.57. If this price holds, the short covering may begin. If it fails as support then look for a break to $44.01.