Oil complex settles higher on crude output, refinery losses

New York — Oil futures continued to rise Feb. 17 as continued frigid weather and power outages took a toll on crude production and refinery operations, mostly in Texas.

NYMEX front-month crude settled at $61.14/b, up $1.09, while ICE front-month Brent settled at $64.34/b, up 99 cents.

In refined products, NYMEX front-month RBOB climbed 3.76 cents to settle at $1.8105/gal, while NYMEX ULSD settled up 2.33 cents at $1.8377/gal.

According to S&P Global Platts Analytics, roughly 4 million b/d of production was down in the US Feb. 17 because of freeze-offs, the bulk of those losses coming out of the Permian and Eagle Ford basins.

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Chevron said late Feb. 16 that it shut in a "significant" volume of its Permian Basin production from winter freezes in the area of the West Texas/southeast New Mexico play.

Platts Analytics expects most of the US production losses to be recovered in the next two to three days as temperatures rise.

Temperatures in Midland, Texas were forecast to rise to above freezing levels by Feb. 19, and hit nearly 60 degrees F by Feb. 21.

Still, "lingering impacts from freeze-offs could mean 100,000-200,000 b/d remains offline over the coming weeks," said Platts Analytics analyst Parker Fawcett.

"Gathering lines or compressors could be damaged, some pumps stuck, all of which could require costly and time-consuming repairs and/or workovers to fix," he said.

Warmer weather will also allow power to return, boosting refinery operations. About 2.6 million b/d of refinery capacity is confirmed shut and a total of 4.8 million b/d of operable refinery capacity reported impacted by subfreezing temperatures.

"Putting things in perspective, it's the double the number closed during Hurricane Harvey, implying a colossal gasoline and diesel fuel loss," said Stephen Innes, chief global markets strategist at Axi, in a note Feb. 17.

However, the wintry weather was also expected to have taken a bite out of demand, which is likely limiting the impact on refined products crack spreads.

The ICE front-month RBOB crack spread to Brent ended Feb. 17 at $15.15/b, up from $13.75/b Feb. 12, prior to the shutdowns. The ICE ULSD crack has climbed to $12.29/b from $11.69/b over the same period.

The states most impacted represent nearly 40% of US oil demand, according to Platts Analytics, and the drop in mobility could have reduced gasoline demand by as much as 675,000 b/d, and distillate demand by as much as 275,000 b/d.

An expected increase in refined products imports is also likely capping the crack spread rally.

Kpler vessel-tracking software shows US gasoline imports rising to 5.61 million barrels the week beginning Feb. 22 and 5 million barrels the following week, from just 3.4 million barrels the first week of April. The bulk of those barrels are arriving on the US Atlantic Coast, home of the New York delivery point for NYMEX RBOB and ULSD futures.

Kpler data is also showing a rise in diesel imports, although not to the same degree as gasoline. USAC gasoline inventories at 70 million barrels the week ending Feb. 5 were roughly on par with the five-year average, while diesel inventories at 52.8 million barrels were 13% above the five-year average, US Energy Information Administration data shows.

Vaccines, OPEC+ cuts supportive

Crude futures also found support Feb. 17 from the coronavirus vaccine rollouts and continued OPEC+ supply cuts.

"Europe finally getting their act together" on the vaccine front will be a catalyst for higher oil prices, said OANDA analyst Ed Moya. "You are going to see the return to normal behavior."

"We are still of the view that the demand recovery is going to be a long and slow process, and it is only when we get into the second half of this year that we should see a more robust recovery," ING analysts said in a note Feb. 17.

Oil prices dipped temporarily on news reports that Saudi Arabia might soon reverse its oil production cuts.

However, Saudi energy minster Prince Abdulaziz bin Salman later said OPEC+ should not celebrate the recent oil price rise prematurely, as the oil outlook is still uncertain.

OPEC and its allies are set to meet March 4 to decide on quotas for April and perhaps beyond.

If OPEC+ decides to reduce its output cuts to 5.8 million b/d -- the level they initially agreed to -- it would mean an addition of slightly over 2.2 million b/d to the market. However, analysts believe this to be unlikely.

"It will be necessary for the group to continue to present a unified front and convey the impression that it is still enforcing supply discipline. I suspect behind-closed-door discussions will focus on adding more oil back into the market without upsetting the proverbial apple cart," Innes said.