Oil traders are rushing to book tankers to haul European gasoline across the Atlantic Ocean as Hurricane Harvey transforms the global market for refined fuels.
Traders booked 20 tankers to load European fuels to the U.S. since Harvey made landfall on Aug. 26, according to charter lists compiled by Bloomberg. The rate of bookings is about double the average for August. Most cargoes are 37,000 metric tons each. Shipbrokers said cargo flows to New York will be the highest since November, when a pipeline blast curbed inflows from the Gulf of Mexico.
Harvey, now a tropical storm, has brought torrential rain and the collapse of levees, dams and drains. It’s also knocked out almost a quarter of U.S. refining capacity, of which more than half is in the Gulf of Mexico region. That in turn has lowered domestic crude prices, since fewer plants are able to process it, while simultaneously restricting the supplies of fuel like gasoline and diesel.
“It will take several weeks before the whole refining capacity is restored,” said Ehsan Ul-Haq, a London-based director of crude oil and refined products at Resource Economist Ltd. “As a result, increased gasoline flows from Europe to the U.S. will continue at least for three to four weeks.”
Many of the tankers booked for cross-Atlantic voyages have multiple options for where to take their cargoes. That means that some could also head to Mexico, which is competing with the U.S. for resupply because of fuel shortages of its own.
A survey of shipbrokers showed they anticipated 30 cargoes being booked to load over the next two weeks. The last time shipments were higher was in early November last year, after an explosion and fire curbed flows through the Colonial pipeline to Greensboro, N.C., from the Gulf Coast.
European gasoline cracks, a guide of profit for refiners processing the fuel, have surged to a two-year high, according to data from PVM Oil Associates Ltd. On a seasonal basis, it’s the highest ever. A barrel of the fuel costs $18.44 more than crude, a record for the time of year, according to PVM data compiled by Bloomberg. That’s at a time when the outright price of crude itself is still trading at less than half of where it was in mid-2014.
With estimated costs of the disaster rising each day and the full extent of damage to refineries in the Gulf of Mexico still unclear, the shipments may continue for weeks to come. Plants handling 4.3 million barrels a day of crude were halted by Harvey, data compiled by Bloomberg show. The nation can process about 18.6 million barrels a day, of which about 9.7 million barrels a day is in the region including Houston.
“With sharply rising flows from Europe to the U.S. Gulf, we’re also seeing a massive spike in crack spreads,” Carsten Fritsch, an analyst at Commerzbank AG, said by phone of the European gasoline market. “It depends on how long the refinery closures will remain in place. As long as this is the case flows will continue and crack spreads look well supported.”
It’s not just European gasoline markets that have risen since Harvey hit, gasoil markets are strengthening sharply too as the region depends on Gulf of Mexico refineries for imports. In a market that was already showing signs of tighter supply thanks to major disruption at Pernis in Rotterdam, Europe’s largest refinery, the severe restriction of flows from the U.S. is also providing support. Contracts for October delivery are now about $6 a ton more expensive than those for November, a market condition that indicates concerns over a scarcity of supply.
“For gasoil we had the disruption from Pernis and now with the storm we’re likely to see limited gasoil flows to Europe,” said Warren Patterson, a commodity strategist at ING Bank NV. “We could see Europe looking more towards Asia to meet any shortfall from the U.S.”
Goldman Sachs Group Inc., PVM Oil Associates and JBC Energy GmbH were among the oil market watchers to say that European refiners are set to benefit from the supply outages cause by Harvey. Outages in the U.S. will lead to “windfall profits” for European refiners as gaps demand gaps are filled, JBC said.