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How Will Harvey Affect Oil Inventories?

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Includes: BNO, DBO, DNO, DTO, DWT, OIL, OILK, OILX, OLEM, OLO, SCO, SZO, UCO, USL, USO, USOI, UWT, WTID, WTIU
by: ValueAnalyst
Summary

Weekly oil inventory reports will be volatile for the next few weeks.

Crude oil inventories are projected to see double-digit builds, but gasoline inventories will likely drop.

I will be watching changes in total oil inventories to cut through the noise.

Investment Thesis

Investors are warned that oil prices' reaction to weekly inventory reports will likely be volatile and unpredictable in the coming weeks, starting with tonight's API report. I will be watching changes in total oil inventories to cut through the noise.

What's Happening?

According to a Reuters article, Hurricane Harvey has killed an estimated 50 people and caused $150 billion to $180 billion of damage. As of Sunday, September 3, a combined 2.3 mbd of refining capacity remained offline, according to S&P Global Platts, a significant improvement from the peak outages that exceeded 4 mbd at the end of last week.

Impact On Inventory Reports

Let's take a quick look at the relevant table:

Crude Oil Inventories

This is the most widely watched category, to changes in which algorithms react first as soon as weekly inventory numbers are released. Needless to say, the more than 2 mbd of refinery outages will show up as double-digit crude oil builds for this week and next, at the very least. Francisco Blanch, Bank of America Merrill Lynch head of global commodity and derivatives research, recently told CNBC that we could see a 40 mb to 50 mb buildup in U.S. crude inventories in the next few weeks.

Note, however, that even though refinery outages piled up in the last week, there will be partial offsets from production stoppages in Gulf of Mexico and Eagle Ford as well as lower imports due to port closures, so I do not expect crude oil builds to be as high as BoAML's estimate of 40 mb to 50 mb.

Production Shut-ins

Hurricane Harvey also affected offshore production. The Bureau of Safety and Environmental Enforcement said Sunday that almost 22 percent of current oil production in the Gulf of Mexico (or 378 kbd of 1.75 mbd) has been shut-in, based on reports from operators. There were also reports of temporary production shut-ins at Eagle Ford.

Trade

Gulf Coast (PADD 3) ports were closed throughout the hurricane, which significantly affected exports and imports of both crude oil and products. Note however that daily total oil imports into PADD 3 is lower than total oil exports out of PADD 3.

Bottom Line

There are many moving parts, and it's difficult to gauge the hurricane's relative impact on each piece. I expect, however, that refinery outages will have outweighed production stoppages, which will likely lead to significant crude oil builds. On the other hand, since the national demand for gasoline is not likely impacted significantly from a hurricane in Gulf of Mexico, I would expect corresponding gasoline draws. In order to cut through the noise as much as possible, I will be watching the change in total oil inventories.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.