It could be weeks before refineries return to normal
The fallout from the severe winter weather that disrupted oil production in West Texas and refineries along Gulf Coast is expected to support crude prices, which rallied Monday.
The temporary loss of some 4 million barrels a day of U.S. oil production during last week’s freeze is contributing to tighter supplies as OPEC and its allies appear to be sticking to production curbs, analysts said. The prospects of a strong economic recovery as vaccinations bring the pandemic under control are also supporting the rally.
Oil gained nearly 4 percent in New York Monday to settle at $61.49, the highest close in 13 months.
The freezing rain and sub-freezing temperatures across the U.S. Gulf
Coast last week led to the shuttering of four of the largest refineries in Texas. In total, more than 20 oil refineries across the South were affected, while frozen well heads and pumps temporarily shut in as much as 40 percent of total U.S. crude oil production.
Tamas Varga, an analyst at London oil broker PVM, said it could be weeks before operations for Gulf Coast refineries return to normal.
“If that is the case, product supply to the East Coast will be disrupted,” he said. Refinery disruptions could still lead to elevated wholesale prices in gasoline and other petroleum products, which would trickle down to the consumers across the country.
The fuel-tracking website GasBuddy said average gasoline prices jumped 12 cents a gallon in Houston and 10 cents nationally.
Crude oil prices benefited last week from the combination of supply disruptions in Texas and output curbs by the cartel known
as OPEC+. But Ole S. Hansen, the head of commodities strategy at Saxo Bank in Denmark, said the buying was not as strong as expected, a sign that the rally could run out of steam.
“The fact that continued and
strong bullish momentum, especially across gasoline and distillates, failed to attract even more buying was perhaps a sign that the sector has reached its potential based on current fundamentals,” he said.
Bullish trends for the price of crude are somewhat detached from what fundamentals would otherwise support at least for the short-term, analysts said. Despite optimism about the recovery will gain strength later this year, U.S.
unemployment remains high and job growth weak as it waits for additional federal stimulus spending.
Beyond February, market watchers will be keeping close tabs on the expanded cartel known as OPEC+, listening to the chatter ahead of next month’s meeting of the committee monitoring market conditions, Hansen added. That committee is chaired by non-OPEC member Russia and the cartel’s de facto leader, Saudi Arabia.
As was the case early last year, both have competing market interests. Saudi Arabia wants higher oil prices and tight discipline to boost oil revenues, while Russia has greater interest in increasing its market share by pumping more oil, even at lower prices. Differences between the two last year led to a brief price war that sent prices plummeting.
On the flip side, the adherence of OPEC+ members to output reductions means the subsequent higher price for oil could result in an increase in U.S. shale oil production, offsetting the cartels output cuts, analysts said.