Oil Price Fundamental Daily Forecast – U.S. Supply Will Rise 1.4M BPD Until Refinery Production Resumes

U.S. West Texas Intermediate crude oil futures were hit hard by traders on Monday, falling nearly 3 percent, after Hurricane Harvey caused massive flooding along parts of the Texas Gulf Coast, a major petroleum refining hub.

October West Texas Intermediate Crude Oil futures settled at $46.57, down $1.30 or -2.72% and November Brent Crude Oil closed at $51.42, down $0.56 or -1.08%.

Several refineries have shut down because of the dire conditions, while ports in the area were closed to all incoming and outgoing traffic. The flooding is so widespread that government and company oil company officials are saying that workers will not be able to access the facilities for days. The U.S. Gulf Coast is home to nearly half of U.S. refining capacity.

Nearby gasoline prices spiked higher to their highest level since late July 2015, as the refinery outages threatened to create a short-term supply shortage. At the same time, crude oil prices plunged because of lower demand expectations. The storm is expected to continue to be bearish for crude oil prices because refineries will not be able to operate at the high run rates seen in July and August, reducing demand for crude.

Forecast

Profit-taking and short-covering is helping to drive WTI prices slightly better early Tuesday. There have been no major changes in the news. Officials are still waiting for the rain to stop and for the flood waters to recede before they can assess the damage, if any, to the oil refinery infrastructure. If there is no damage then the refineries can reopen, but workers are going to have to be able to get there.

According to Reuters, Motiva will decide on Tuesday morning whether to shut the 603,000-barrel-per-day (bpd) Port Arthur refinery, the nation’s largest because of high water in the plant.

Goldman Sachs said in a note to clients, “Data available so far point to sizably larger refining production disruptions.”

At this time, the U.S. crude oil supply is expected to increase by about 1.4 million bpd until the refineries are up and running. Given this information, gains are likely to be limited and losses could be extended, depending on how long the refineries are shut down.

From a trading standpoint, crude will bounce back as soon as there is news about when refinery production can resume. Right now, investors have priced in a few days of no refinery activity. Prices will fall further if it takes weeks rather than days to get up and running.