Diesel prices got another boost Monday as the deep freeze hitting Texas that drove up natural gas prices to astronomical levels late last week is now resulting in the closure of refining capacity.
The one refinery that has confirmed its closure due to weather-related problems is the biggest in the U.S. — the Motiva refinery in Port Arthur, Texas, at 600,000 barrels per day. Reuters and Bloomberg both reported that the closures had been confirmed with Motiva, which is 100% owned by Saudi state oil company Aramco.
There were other reports from Reuters and Bloomberg about refinery closures. ExxonMobil (NYSE: XOM) is reported to have closed its Beaumont, Texas, refinery. That refinery has a capacity of approximately 360,000 b/d.
The Citgo refinery in Corpus Christi that has capacity to process 167,500 b/d of crude oil is taking its crude units offline, according to Bloomberg. Units farther downstream may continue to operate but the loss of the crude capacity is another step in tightening up supply farther out on the calendar.
There are other unconfirmed reports of cutbacks in the refining sector. Regardless of how many are true, it is clear that at least 1 million b/d of refining capacity on the Texas Gulf Coast is in the process of going offline. If the other reports are accurate — and given the cold-related power crisis in Texas, there is no reason to believe they aren’t — the loss of refining capacity will easily top 2 million b/d.
U.S. refinery throughput of crude recently has been running around 14.6 million to 14.7 million b/d.
Another concern is that shutting down a refinery for an oncoming hurricane as a precaution usually has a relatively quick resumption of action unless there’s major damage from the storm. In the rare instances when refineries in the Gulf Coast are brought down by the occasional extreme cold snap, they often do not simply snap back. They sometimes can take days or weeks to return to normal. In some cases, it may take more than weeks.
Closures of the refineries due to cold weather are extremely rare occurrences. This one was driven by a historic cold snap that is dropping arctic air down to the Texas-Mexico border. In markets, it made itself felt Thursday when natural gas trading at certain pipeline delivery points that service the Gulf Coast and mid-continent market shot up to as high as $600 per million BTUs. Meanwhile, the price Monday on the CME commodity exchange for delivery of gas in Louisiana a month from now was trading at about $3 per million BTUs.
That vast difference is that the trading at the pipeline delivery points is for relatively immediate natural gas deliveries, so it will be impacted by the current weather. And what that market is facing is the fact that Texas is reporting natural gas and oil wells freezing over, by gas processing plants doing the same and by electricity demand in Texas — where homes being heated by electricity is a significant part of the market — hitting record levels. All of this is in a state where the highest electricity consumption days are generally from demand for air conditioning on hot days.
Prices on the ultra low sulfur diesel contract at CME were up significantly Monday, but that is the price for ULSD to be delivered into New York Harbor in March, when presumably any sort of crisis will be over. However, restocking of inventories as a result of the loss of supply from the refinery outages will almost certainly impact markets.
With all of that going on, at approximately 2:30 p.m. EST Monday, the price of ULSD on CME was up 4.05 cents/gallon, an increase of 2.29%, to $1.8119/g. Because of the Presidents Day holiday, there is trading but there is no settlement for the day. The next settlement will follow trading on Tuesday.
In the physical diesel markets, there were no indications of prices relative to the CME ultra low sulfur diesel because of a lack of holiday trading. However, the price of wholesale diesel at the Houston rack, which is the industry terminology for that wholesale outlet, averaged $1.842/g on Monday in Houston, up 2.2 cents per gallon from the posting of Friday.
The suppliers of diesel at the rack will be lacking the physical differentials from the prior day when they set those wholesale prices Tuesday, since there was no physical trading. But when Tuesday trading commences in physical markets, the activity will not be for diesel a month out, as it is on the CME. It is for delivery in the next several days, and the impact of the refinery closures, which were not foreseen late last week, will be present in the minds of buyers and sellers.
The weekly Department of Energy/Energy Information Administration average retail diesel price, normally released on Mondays, is delayed by a day this week because of Presidents Day. If it is higher when posted Tuesday, which seems a certainty based on increases in retail prices reflected in the DTS.USA average retail price found in SONAR, it will be the 15th consecutive week of increases. That will tie the record of the longest streak since the data series was created in the early 1990s.
With refineries going down, focus will start to shift toward inventories. The EIA does not break out diesel in its weekly reporting of inventories. The category it reports is labeled distillates, which includes non-jet fuel middle distillates such as diesel and heating oil.
The easiest way to measure inventories is by days’ cover, the number of days of consumption that could be covered strictly by inventories. In the most recent weekly report, that stood at 38.8 days, slightly more than the five-year average of 37.6 days.
Additionally, there is slack in the refining system, with refineries in the Gulf Coast region known as PADD 3 operating at 85.3% of capacity last week, according to the EIA. In the Midwest PADD 2 region, it was pretty much the same, at 85.4%. That does signal that there is refining capacity that was sitting on the sidelines before the shutdowns, but if refineries across the Gulf region are closing down across the board, that won’t matter much. However, it does signal that when they come back, unused capacity may be called upon to catch up to the loss in production if it goes on for any significant amount of time.