With Hurricane Harvey barreling down on the Gulf Coast complex of refineries and oil terminals, you might have expected the price of gasoline to rise yesterday, August 24, on fears of a shutdown of supply.
And it did. The price of gasoline climbed 2.35% yesterday on the commodities market.
The price of oil fell, though, with West Texas Intermediate falling 1.63% on the day. The fear here is that an estimated one-third of refineries are about to go off line because of the storm. And right now the oil market counts, heavily, on those refineries to sop up part of the excess in global supply. If those refineries aren’t running and if they aren’t pumping oil into their storage tanks that just pushes more oil onto global markets that already have more oil than they know what to do with. The storm doesn’t look likely to disrupt production from the inland oil shale regions so producers there will just keep pumping oil onto the market even if the refineries are shut down. Or at least that’s the scenario that worries markets.
For the week ended August 11 refinery utilization hit an all-time high of 17.8 million barrels per day. That dropped only slightly for the week ended on August 18–by a whole 130 barrels a day.
Which does make you wonder where the market is going to put all that refined product. Especially since the summer driving season, with its high demand for gasoline, is coming to an end. From the point of view of the gasoline market–although certainly not that of the workers and residents of the Gulf Coast–Hurricane Harvey comes at a good time since it will cut gasoline supply just at the often tricky industry slow period between high summer demand for gasoline and the peak winter demand for heating fuel.
Refineries traditionally use this shoulder period to do regular maintenance on their equipment and to make the seasonal transition between products.
All of this argues that the spike in gasoline prices because of the hurricane should dissipate relatively quickly since it comes just as seasonal demand is about to move lower.
The storm also illustrates how tough it is at the moment to figure out how–maybe better make that “if–refineries will profit from shifts in oil prices. All things being equal, oil refinery margins have in the past gone up when crude gets cheaper and the price of refined products such as gasoline prove sticky at higher levels. That historical pattern doesn’t play out in quite the same way in the current market since so much of U.S. refining capacity was built to use relatively heavy grades of crude, grades that have to be imported from suppliers such as Venezuela. Many of these refineries actually can’t use the lighter crudes produced by U.S. oil shale wells and the low price of this crude because of the supply glut created by historic levels of U.S. production is irrelevant to U.S. refineries and their margins.
My position in refiner Marathon Petroleum (MPC) in my Jubak Picks portfolio hasn’t set the world on fire, rising just 3.7% since I made that buy back on April 8, 2015. (The stock does pay a dividend of nearly 3% so the total return on this position is greater than just the price appreciation.)
With the soft shoulder season for refiners approaching and the high utilization rate of refineries likely to result in rising supplies of gasoline and other refined products, I’m going to sell this position out of the Picks portfolio tomorrow August 25 in order to take advantage of the storm-driven spike in gasoline prices and in the shares of refiners. Shares of Marathon Petroleum rose 1.91% on August 24, to $51.13 on Hurricane Harvey’s approach to the Gulf Coast. they climbed another 1.15% today, August 25.
This sell also has the effect of raising some cash in this portfolio, which independent of other factors strikes me as a prudent move in a period of rising uncertainty in the general market. More on that risk and uncertainty in a post Friday, August 25.