September 11 Quick Update: Fuel prices are going absolutely ballistic this morning as Ike heads toward the largest refinery cluster on the planet. The thoughts below are still appropriate but the numbers have changed. We are seeing the price of spot or wholesale physical gasoline today at anywhere from $4.25-$5.00 gal at the Gulf Coast, and other markets are up sharply as well.
TK
Note to reporters: Yes, gasoline prices moved up in quite a few cities and states in the last 48 hours, even as some benchmark crude oil blends traded for less than $100 bbl for the first time since April 3, 2008. Boone, we hardly knew ye.
As I write this, the price of gasoline in the biggest global bulk market (the U.S. Gulf Coast) is trading for some 60cts gal or more above gasoline futures, or about $3.30 gal late Wednesday afternoon. It appears as though Ike has put some of the largest clusters of U.S. refining in jeopardy. For a look at how storms can impact refiners even if they make landfall in rural counties, skip to the end of this blog. It’s worth it.
But here’s the bottom line. Even though WTI crude futures closed at $102.58 per barrel today, or about $2.44 gal if you do the math, the price of gasoline has ascended to nearly $140 bbl. That is an altered relationship, much like we see in politics or in Hollywood these days.
The last time we saw crude oil prices this cheap, the national average price for gasoline was about $3.25 gal. It’s about 40cts gal higher than that now, and I suspect we’ll see more increases in some markets by the weekend, even if Ike fizzles and cuts a path through rural less populated counties. Chicago is many states removed from Hurricane landfall, but even there, we’ve seen the impact of Gustav as well as the threat from Ike. Refiners have had less crude to run, and wholesale prices there have also moved into the $3.25 gal or higher neighborhood. This explains why some Midwestern towns saw some large retail increases even as network talking heads discussed plunging crude prices.
A Little Bit Kinky
I want to repeat a mantra that I first stated at the end of August.
Hurricanes generally destroy more demand for crude than supply. But they also destroy production of gasoline and diesel fuel, even if they miss refining centers by hundreds of miles (again, see the story at the end of this post for reference).
Most of the upwelling we’ve seen in fuel prices in September is related to Hurricane Gustav. It did not significantly damage refinery infrastructure but it did result in a drop in refinery output of nearly 2-million bbl per day last week (as measured by the Energy Information Administration or EIA today). Those kinks of lost daily output are now being felt in places like Kentucky, Tennessee, Illinois, and especially in states like Florida. Even California isn’t exempt -- the state gets some of its very clean gasoline from refineries in the Canadian Maritimes and a key plant in the Virgin Islands. Fuel produced at those plants will probably be diverted to coastal states in the U.S. this month.
Even if Ike misses Texas refinery infrastructure, more kinks are coming, and Americans will inaccurately assume that they are being hosed. Capitalism is at work here – supply is threatened—and buyers outnumber sellers, for the moment.
The paper markets (futures & options) represent a view of the U.S. some 20-30 days from now and they also reflect the macroeconomic pessimism about global demand. There is also a shocking lack of faith in all sorts of paper instruments peddled by Wall Street, be they shares of stock, bonds, or even commodities contracts.
Don’t be surprised to see crude oil prices of below $100 bbl, but don’t be shocked if retail gasoline prices jog higher as well. CNBC’s Larry Kudlow has been touting an oil price dividend, or the equivalent of a consumer tax cut, thanks to lower priced crude. We can’t run that $102 bbl crude in our cars, trucks, trains, or jets in the next 20 days and therein lies the problem.
Speaking of Ike
When I was a young tyke, we didn’t channel surf as much as we did channel squats. Our blue collar household did not have a remote control which in those days was about as large as a 2008 microwave. Hence, my Dad would tell me to get up from my supine position and change the channel. It was good for the thighs.
But when I obeyed my father’s commands (always), it was often to switch from Hullabaloo, or Shindig, or even Ed Sullivan.
When I hear of Hurricane Ike, I can’t but think of one person - - Ike Turner – and the Ike & Tina Turner Revue. Their act was regarded as risqué or edgy back then, and as we now know, Ike didn’t behave like Ward Cleaver toward Miss Tina.
I mention this only because while channel-surfing last night, I happened to catch the Pussycat Dolls. They make Ike & Tina Turner look like the Carpenters. I’d dare say they even make the Spice Girls look like the Lennon Sisters.
How Hurricanes Impact Coastal Refineries (reprinted from the OPIS newswire)
ANSWER TO REFINERY SHUTDOWNS IS BLOWING IN THE WIND (9/10/2008)
The next time you watch television meteorologists display "probability cones" for hurricane strikes, remember that the managers of multi-billion dollar refineries instead must deal with "possibility" cones.
It's the dreaded impact of a power loss at a major U.S. refinery that drives many processors to close units that are on the outskirts of hurricane centers and tropical wind fields, OPIS sources stress.
That said, Hurricane Ike's probability cone still includes a considerable portion of the Texas coast. Refinery experts tell us that decisions to preemptively idle units at critical plants have less to do with the dynamics of a direct hit, and more to do with the precautions necessary to avert financial disaster with, say, a 50-mile-per-hour wind.
Even with relatively rugged profits in the first half of 2008, refineries in Texas and Louisiana have valuations that are several times what these plants were worth as recently as 2002. Accordingly, operators need to err on the side of caution if storms threaten the complexes that by virtue of logistics are often closest to tidal surges and offshore winds.
The multiple factors that go into a precautionary shutdown include the size of the refinery, its proximity to the coast, the topographical elevation of its units, and of course the storm's strength, speed and projected path and variance. But the decision to bring units into planned shutdown almost always is based on a forecast for wind speeds that are likely to trigger power outages.
These days, Gulf Coast refineries are very dependent on the local utilities, and the threshold at which power outages are anticipated starts at about 50 miles per hour. Once winds in that neighborhood are expected, all kinds of hurricane preparation steps will be implemented.
"One rule of thumb Valero uses is that if a shutdown is necessary, it should be complete before 50 mph winds arrive," Valero spokesman Bill Day told OPIS. "Refinery units are built to withstand winds much stronger than that, but with 50 mph winds, power losses are likely and outside work becomes risky." Day said that as Valero watches Hurricane Ike, company emergency managers will conduct daily meetings to discuss preparations. Those meetings will become more frequent as the storm approaches, and the conclaves will ultimately yield the decisions about which steps are reasonable and how long it might take to safely shut down a specific plant.
"In each case, when a storm moves into the area, emergency planners assess how long it will take for a refinery to be safely shut down, if necessary," said Day.
Most refiners along the Gulf Coast are now well into what is known in the industry as "Phase Two" of hurricane preparation. Phase two at most refineries begins when a storm enters the Gulf of Mexico. Plant safety managers at each facility call for a meeting to review storm-specific information and make preparations for potential impact to the refinery. Action items include preparing for slowing or shutting down of the refinery's operations, developing contingencies for loss of necessary materials or infrastructure, and listing equipment that would need to be removed in the event of a storm.
If, about three days ahead of landfall, a refinery is in the zone where there is a 97% or greater chance that the storm will hit, the staff will begin to prepare for the possibility of mandatory evacuations and a facility shutdown. Plans would include meeting frequently to review the situation as well as to prioritize installation of emergency equipment, shutting down computer systems, and the like.
It takes anywhere from 24 to 36 hours to shut down a modest-sized refinery before predicted landfall and closer to 48 hours for a more complex or large facility, sources say, so a projected landfall for Ike on Friday, Sept. 12, would imply that most refineries commence implementing an orderly shutdown some time Wednesday, unless the wind field from the storm is large enough to push 50 mph winds into the area earlier. Outside of a flood threat, wind speed is the most critical factor for a refiner, as each unit is rated to deal with a certain level of wind.
Refiners will cut crude runs by a certain percentage and curtail operations for other units by the same percentage. Gradual reductions are optimal. The level of shutdown depends on the predicted severity of the storm and potential flooding. A major storm and a predicted "direct hit" prompts most plant managers to order a "cold shutdown," in which no recycling in the units is continued.
The refiners in the Corpus Christi area face a particular set of issues, though, compared to others along the Gulf Coast. There is only one refined products pipeline moving product out of Corpus Christi into central Texas, and the rest moves via the water to markets such as Houston, where there is access to other products pipelines.
"Refiners in Corpus Christi can only handle three to five days of production based on their limited storage, and any interruption in shipping will impact them. Some may have already begun to slow units and ramp down production in an effort to avoid logistical issues," said one source.
Some market observers believe that a lack of understanding of hurricane dynamics is the key to recent topsy turvy U.S. spot fuel prices. Crude oil has been on a clear downtrend since mid-July, but physical gasoline and diesel prices have zigged and zagged as crude values have moved steadily lower.
Many of the new financial traders, one source noted, have no real appreciation for the logistics that can dominate the Gulf Coast. Some may have been exposed only to the catastrophic Hurricane Katrina, which represented the rare storm that struck a direct hit on refining clusters, and others base their strategies less on the physical world, and more on the interaction between commodities, currency and money flow.