Addressing recent events transforming the U.S. oil and gas market
Unexpected surprises continue for the U.S. gasoline market in 2016, this time with gasoline prices underpinned as an inventory surplus was sharply cut. The East Coast has been affected in particular, with gasoline supply plummeting from a 36-year high to a 21-month low.
With record high gasoline production holding supply well above the historical average in 2016, what has finally shifted the market from bearish to bullish?
OPEC Production Cuts
With an ongoing imbalance threatening to press global oil prices lower still, OPEC decided on Sept. 28 to cut production. Admitting that the imbalance of global oil supply-demand would indeed continue well into 2017, the 14-country member finally agreed to reduce production – the first cut in eight years.
Beginning this November, OPEC ministers have agreed to a production range between 32.5 and 33.0 million bpd in contrast to their August output of roughly 33.3 million bpd. Details to these cuts will come about when OPEC meets in Vienna on Nov. 30.
Colonial Pipeline Leak
On Sept. 9, a leak was found on the Colonial Pipeline’s 36-inch gasoline main line 1 in Alabama that disrupted service. Not returning to full service until Sept. 21, the Southeast north through the mid-Atlantic saw limited new gasoline supply which led to steep drawdowns in regional stocks.
This caused supply shortages, namely in the Southeast..
The first hurricane in 11 years to make landfall in Florida, hurricane Hermine disrupted shipping lanes and sea-to-shore off-loading after it hit on Sept. 2. This natural disaster drew dawn East Coast gasoline supply 2.284 million bbl to 64.894 million bbl during the week ending Sept. 2 and another 884,00 bbl by Sept. 9.
Both the pipeline and hurricane disruptions occurred in the midst of transition when refiners were moving out summer grade product to make room for winter grades – leading to a drop of nearly 6.0 million bbl in PADD 1C, the Lower Atlantic, according to the EIA. This drop in the region’s supply was the largest on record and well above the previous large drawdown in June of 2003 of 2.9 million bbl.
National Gasoline Outlook – Supply Demand Leveling
In light of a second hurricane in the past two months, this time Matthew – category 4, shipping lanes and pipeline service had again been disrupted. With East Coast supply taking another hit, gasoline prices have increased as decreasing supply combats the imbalance seen over the past year. This decrease in supply and climb in price has been another bullish factor underpinning higher fuel prices.