Global fuel prices rise as Harvey's effects ripple beyond US Gulf

Houston Refinery in Path of Harvey Closes

Amid the shutdown of 20 percent of US refining capacity caused by Hurricane Harvey and the pending shutdown of more refineries as the storm moves on to Louisiana, the EIA's latest weekly inventory report may limit the fall in WTI prices.

But gasoline futures skyrocketed 7% to a 25-month high, as traders realize that refineries will be shut for some time.

Backwardation, when the front-month contract is more expensive than subsequent months, makes it uneconomical to store crude, resulting in the drawdown of inventories.

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.

U.S. West Texas Intermediate (WTI) crude futures CLc1 were at US$46.35 per barrel at 0155 GMT, down 9 cents from their last close.

Brent crude, the worldwide benchmark for crude trading, was down 30 cents at $51.70 a barrel by 0825 GMT.

"We could see rising USA crude inventories in the next couple of weeks until demand from refineries recovers".

Retail gasoline prices in Texas and across the country spiked by at least a dime following disastrous Hurricane Harvey.

"Hence, the negative impact on crude oil demand and oil product supply might be less severe than feared". However, the assessment does not include the impact of storm Harvey.

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USA crude and product stocks, typically watched closely by oil investors as they reflect market balancing, were largely ignored this week.

USA gasoline futures RBc1 topped $2 per gallon for the first time since 2015, with benchmark prices now up more than 20 percent since the August 23 close, just before the storm's beginning. The SPR, established in the 1970s, now contains 679 million barrels of oil. The jump came after the Colonial Pipeline, the biggest US fuel system, said it would shut its main lines to the Northeast by Thursday, hit by outages at pumping points and lack of supplies from refiners.

Meanwhile, offshore drilling in the Gulf has fallen off since the shale boom took off more than 10 years ago, shifting more production inland to less hurricane-prone areas like the Permian Basin. "It has to come from Asia even".

"I would say two weeks as an absolute best case scenario (to get refineries up)".

This crude will now either have to be put in storage, or find other buyers.

Harvey caused considerable damage and flooding in Texas and is now moving into Louisiana, where further floods are anticipated.

There is little doubt that Harvey has complicated the efforts by OPEC and its allies to force global inventories lower, but if they respond by tactically allocating different grades of crude among customers, it could still work to their benefit. That has pushed USA crude prices below prices for crude elsewhere, making it cheap for global refiners if they can still get a cargo out.

It remains to be seen whether this can be done at relatively short notice, but as things stand now, Harvey is providing a wealth of trading opportunities.

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