A version of this Spotlight from S&P Global Platts Analytics was first published February 26; this version has been updated since.
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Temperatures dipped far below normal levels in the mid-region of the US during the week ending Feb. 19, causing substantial production freeze offs and power outages at refineries, terminals, and processing plants. Oklahoma and Texas were particularly impacted by the extreme cold weather, with portions of those regions dipping to 40 degrees below normal temperatures for this time of year.
On the supply side, the impact from freeze offs peaked on Feb. 17 with 4 million b/d of crude being offline, resulting in production being down 2.5 million b/d on average during the week. Approximately 90% of the losses were estimated to be back online early the following week. The freeze offs also caused 20+ Bcf/d of natural gas to be offline at the storm's peak.
The WTI 1:2 contract flipped into contango on Feb. 16 as flows on pipelines that run from Cushing to the USGC were choked back due to power outages at destination facilities. Accordingly, inventories at the Cushing storage hub built by 2.8 million barrels during the week ending Feb. 19. As power outages at terminals along the USGC were resolved during the week following the storm, pipeline flow from Cushing to the USGC ramped back up.
Overall, the loss in refinery runs is expected to total 50-70 million barrels while the loss in crude production will be around 19 million barrels. Consequently, the net effect is to temporarily increase crude length. For products, roughly 30 million barrels of gasoline and 20 million barrels of middle distillates were not produced, at least until refineries ramp back up and probably increase their run plans to backfill.
The mid-continent portion of the US has had nearly a week to thaw since a polar vortex moved through the region, causing temperatures to dip to 40 degrees below normal in parts of Oklahoma and Texas on Feb. 15. The drastically cold temperatures sharply impacted both supply and demand, with parts of Texas experiencing large scale power outages through Thursday, Feb. 18. Production was able to start recovering quickly after the event, with the 4 million b/d that was offline at the peak having recovered by 90% by early the following week, with 95% of the lost production back online by late in the week.
Refining, on the other hand, is taking longer to rebound from the massive power outages. In its weekly estimates, the DOE reported refinery runs falling by 2.6 million b/d for the week ending Feb. 19 and falling by an additional 2.3 million b/d during the week ending Feb. 26. Most of the decline took place in PADD 3, with PADD 2 also declining both weeks. Refinery outages persisted through the week ending Feb. 26, with runs averaging 9.9 million b/d during the week (as opposed to 14.8 million b/d during the first two weeks of February). Runs will start rebounding during the week ending March 5 but will take several weeks to return to the levels seen in early February.
Distillate inventories declined by 15 million barrels during the two weeks ending Feb. 26, while gasoline inventories declined by 14 million barrels. Gasoline and distillate inventories in PADD 3 had been above the top of their normal ranges prior to the storm, with the substantial draws post the storm causing them to return to more normal levels for this time of year. Gasoline and distillate inventories in PADD 1 are slightly elevated compared to normal levels but offer less contingency as refinery runs in the USGC, which is a major exporter to PADD 1, remain challenged.
The steep drop-off in refinery runs in PADD 3 during the week ending Feb. 19 caused margins in that region to increase by $2.9/b, with gasoline and distillate cracks rising by $5.1/b and $4.8/b respectively. Despite the increase during the week, margins remain below normal levels versus prior years. The current boost in margins will incentivize refineries to ramp up runs as units are cleared for restart, potentially putting downward pressure on margins in the months to come. In total, approximately 19 million barrels of crude oil production was lost because of the polar vortex, and 50+ million barrels of refinery runs are expected to be lost through the week ending March 5. Runs are likely to be higher during Q2 than previously expected to make up for losses during February and March.