Oil dips as USA floods cause large-scale refinery shutdowns

Vehicles sits half submerged in floodwaters in a residential area of Houston in the aftermath of Hurricane Harvey Sunday

The Gulf accounts for just 15 percent of US oil production, compared with almost 30 percent a decade ago, according to RBC Capital Markets.

"The market focus seems to be on the quantity of refinery capacity shut-ins and potential to hit oil demand", said Giovanni Staunovo, an analyst at UBS Group AG in Zurich.

"It will be a while before operations can return to normal and the US refining industry is bracing itself for an extended shutdown", Stephen Brennock of oil broker PVM said.

"U.S. shale has made us much less dependent on Gulf oil and gas production", said Phil Flynn, senior market analyst at Price Futures Group. In other energy futures, heating oil was up 1.3% at $1.68 per gallon while natural gas was down 0.8% at $2.96 per 1 million British thermal unit.

Brent for October settlement, which expires Thursday, slid 47 cents to $51.53 on the London-based ICE Futures Europe exchange. USA crude fell 39 cents to $46.05. "You've pretty much sapped a major chunk of Gulf Coast refining demand", said Anthony Scott, managing director of analytics at BTU Analytics in Denver.

In refined products, price movement was more dramatic and gains increased after sources on Wednesday said Total's Port Arthur, Texas, refinery had been shut by a power outage resulting from the storm.

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Gasoline margins RBc1-Clc1 jumped, as the gasoline crack spread jumped 12.5 percent to $23.45 a barrel, highest on a seasonal basis since 2012.

Lower use of oil at the refineries combined with lower offshore crude production in the Gulf, which the Bureau of Safety and Environmental Enforcement pegged Monday at 331,370 barrels a day, would see crude-oil stocks "rise little over 10 million barrels a week", he said. If refineries remain offline for more than a few days, and stores are tapped into, prices could rise. That's almost twice as much as in September 2008 when Hurricanes Ike and Gustav hit the U.S. Gulf Coast, and in the summer of 2005 when Hurricanes Rita and Katrina struck.

The largest crude oil refinery in the United States, operated by Motiva Enterprises, was shutting down on Tuesday night due to flooding from Harvey in its 603,000 barrel-per-day (bpd) Port Arthur plant in Texas, according to people familiar with operations.

Effects of the damages and shutdowns are expected to ripple for weeks.

A decade ago, before the ramp-up in shale output, the Gulf accounted for closer to 30% of USA crude output, noted Michael Tran, analyst at RBC Capital Markets, in a Monday note.

Another key: the shale oil boom has encouraged US refiners, many of which are along the Gulf Coast, to produce more and more gasoline. Refining capacity utilization rose to 96.6 percent, highest since 2005, a figure that will fall sharply due to massive shutins on the Gulf.

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