Tighter Gasoline Market in September
Roughly 1.7 million b/d of distillation capacity still remains offline in the US Gulf Coast in the wake of Hurricane Ida. Although damage or flooding has only been reported at three of the affected refineries, and damage at Marathon Petroleum’s Garyville refinery was reported as minor, refiners are still assessing many facilities along the Mississippi river, the area hardest hit by the hurricane.
Widespread power outages have delayed the restart of this capacity. As all of the refineries remain without power, any restart is going to depend on the ability of the utility company Entergy to quickly restore high-voltage powerlines and utility towers. Depending on infrastructure availability for replacing the towers and on water levels, we assume that outages could last 2 to 3 weeks. If the utility company has additional tower infrastructure already available, it could shorten that timeline.
Currently, roughly 70 percent of the 1.7 million b/d capacity offline is believed to have no major damage and should return by the third week of September. The roughly 500,000 b/d of capacity that has announced either flooding or damage is likely to be offline for a longer period of time.
Gasoline accounts for half of the refined products produced at the facilities that are damaged or without power. So, most of the impact on petroleum product market supply will focus on gasoline availability, particularly on the East Coast. US gasoline crack spreads were already high before Hurricane Ida made landfall in Louisiana. NYH cracks have now risen by $2 to $24 per barrel in recent days, or by $0.05 per gallon.
With Louisiana refinery throughput down, the coming weeks will be supportive for cracks. We estimate a loss of 250,000 b/d in gasoline supply in September compared to our pre-hurricane forecast, thereby maintaining a relatively tight US deficit for another month. This has implications for gasoline inventories, which are already low at 226 million barrels. Padd 1 stocks are especially tight at 56 million barrels, roughly 8 million barrels (or 12 percent) lower than their average for end August. A tight East Coast market will further incentivize imports of European barrels. The recent drop in ARA gasoline stocks to low levels is evidence that the flow across the Atlantic is already occurring.
In all, these factors will keep NYH gasoline cracks slightly above $20 per barrel in September, delaying the seasonal downturn in cracks by a month. However, there are moderating factors at play as well. For one, September marks the end of the US driving season, with demand expected to fall 500,000 b/d month-on-month. Second, the market is switching to winter-grade gasoline this month, which is easier to make. Last, and most important, Europe’s gasoline surplus is substantial at 700,000 b/d, and refiners across the Atlantic are able to boost runs to make even more.