Blog January 12, 2018

The oil industry was as thrilled as anyone to see the ferocious 2017 hurricane season come to an end. Though the reprieve was short-lived, as the U.S. ushered in the New Year by being battered with extreme winter weather. Freezing temperatures caused production shut-ins in the Permian and Bakken regions, while refinery operations along the East Coast and in the Mid-Continent were threatened by an intense winter storm. The impacts on oil markets appear to be short-lived, but certainly took a toll on normal supply chain activity.

Winter Has Come: Freezing Temperatures Hamper Permian Oil Production

As seen in previous years, cold weather impacted the West Texas Permian crude oil supply chain this winter. Genscape data showed that the recent freezing temperatures impacted production, storage levels, pipeline flows, and crude prices in the Basin.

Production flows across the Permian decreased 426,000 bpd to 2.326mn bpd for week ending January 5, dipping to the lowest level since April, according to Genscape’s U.S. Crude Oil Production forecast. Production flows decreased at the start of the New Year, with the first three days averaging 2.025mn bpd, approximately 700,000 bpd below the December average.

Lower production flows were likely caused by the recent cold weather and associated pipe freeze-off events. Since January 4, production volumes have returned to normal levels, with a peak of 2.828mn bpd on January 7, and the short-lived decrease will have minimal impact to the monthly production averages. Monthly production flows were averaging 2.387mn bpd as of January 8, 564,000 bpd below Genscape's forecast.

Permian Production vs. Temperature

The 426,000 bpd weekly decrease in Permian production was the largest on record since coverage began in 2010. The previous record decline of 328,000 bpd took place during week ending January 1, 2016, and was also spurred by freeze-offs. Last winter was particularly warm, leading to a relatively modest record decrease of 159,000 bpd for week ending December 23, 2016, according to Genscape.
 
Lower supply for week ending January 5 contributed to decreased inventories held in storage in West Texas. Stocks fell nearly 500,000 bbls for week ending January 5, furthering a destocking trend in the region, according to Genscape’s Midland-Basin Crude Oil Storage report. Inventories fell 6.347mn bbls between weeks ending November 10 and January 5. Stocks at the hub in Midland, TX, fell nearly 2.5mn bbls during the same time period, despite rebounding 180,000 bbls for week ending January 5.
 
Monitored pipeline flows out of West Texas decreased 17,000 bpd to 893,000 bpd for week ending January 5, according to Genscape’s Gulf Coast Pipeline report. Flows on Magellan's 275,000 bpd Longhorn pipeline, which carries crude from Crane, TX, to Houston, fell 64,000 bpd to 228,000 bpd after operating above nameplate capacity for six of the past seven weeks. 
 
The recent production freeze-offs and subsequent storage draws supported the differential for West Texas Intermediate (WTI) in Midland which rose $0.10/bbl on January 8 from the week before to WTI-Cushing plus $0.85/bbl. The WTI-Midland differential strengthened $0.95/bbl between December 18 and January 8, according to Genscape’s PetroRail report.

When Well Freezes Over: Bakken Fields Brace for the Cold 

However, the cold snap that swept through the country had a more muted effect in North Dakota despite temperatures that frequently plummeted to below negative 20 degrees Fahrenheit.

The subzero weather presented production and logistical challenges in the Bakken, as output from the shale play in the week ending December 29, 2017, declined 30,000 bpd from the previous week to 1.168mn bpd, according to Genscape data. Though as temperatures warmed in the subsequent week, production in North Dakota parsed the previous week’s decline, as it added 8,000 bpd.

Bakken Production vs Temperatures

Crude production is affected by the freezing weather as equipment has trouble or fails as temperatures reach into the negative 20 degree Fahrenheit range. After the first significant freeze of the winter, subsequent cold spells are less impactful as problems have been identified and remedied, a source said.
 
Loadings of crude onto trains were also affected during the harsh weather, with less crude flowing to the terminals, truck operations slowed and worker efficiency decreased due to the low temperatures. Over weeks ending December 29, 2017, and January 5, volumes loaded in North Dakota averaged about 139,000 bpd, according to Genscape. The two weeks prior, ahead of the precipitous mercury drop, loadings averaged about 166,000 bpd.

The Brrr-fect Storm: The East Coast Weathers a Bomb Cyclone

An extreme winter storm, categorized as a ‘bomb cyclone,' worked its way up the East Coast during week ending January 5, causing freezing temperatures, severe winds, heavy snowfall, and even flooding. The sudden storm had the potential to wreak havoc on the oil supply chain. Substantial refinery and transportation infrastructure lies within the path of the storm, while the heavily populated coast accounts for a good chunk of the country’s refined products demand. However, the industry emerged from the storm relatively unscathed.

Bomb Cyclone 2018

No monitored refinery units were shut down along the East Coast over the weekend, despite the region being pummeled by the winter bomb cyclone, according to Genscape’s North American Refinery Intelligence report. Although some refineries reportedly decreased run rates, the overall impact of the extreme winter weather was much milder than many projections.

Philadelphia Energy Solutions' refinery is expected to begin planned maintenance at a 36,000 bpd catalytic reformer, 50,000 bpd hydrotreater and benzene unit at their 335,000 bpd Philadelphia plant during the week ending January 12, according to a January 8 Reuters report.

The planned work at PES - Philadelphia was delayed due to extreme winter weather in the region, which also caused the refinery to reduce rates due to slowed crude deliveries, Reuters indicates. Crude lightered from ships anchored offshore in PADD 1 in the week ending January 5 declined by 684,000 bbls week-on-week to 1.368mn bbls, with all of the lightering movements coming from the Delaware Bay Anchorage area, according to Genscape’s North American Waterborne Crude report.

Meanwhile in the Mid-Continent, the 64,000 bpd crude section and 16,000 bpd coker at Phillips 66's 306,000 bpd Wood River, IL, refinery were shut December 29 following a frozen pipeline and brief fire, according to Genscape. The units, which are the only known cold-induced shutdowns, remained offline as of January 11. Also at the refinery, the 182,000 bpd crude distillation unit was shut on January 8.

In Canada, the 37,500 CDU and associated vacuum distillation unit at Shell's 75,000 bpd Sarnia, ON, refinery were restarted on January 9 after being shut on January 7, according to Genscape. It is unclear if extreme temperatures contributed to the unit shutdowns at Sarnia.

The extreme winter weather took its toll on regional gasoline demand for the week ending January 5, according to Genscape’s Supply Side data. Gasoline rack activity in PADD 1B for the week ending January 5 fell 8.2 percent from the previous week, and PADD 1A fell 2.5 percent from the previous week, contributing to the 2.8 percent decline in week-on-week U.S. gasoline demand estimates published in Genscape’s Weekly Gasoline Demand report.

Total Motor Gasoline Rack Liftings by State

In that report, Genscape estimated that total U.S. gasoline demand was 8.44mn bpd for the week ending January 5. In contrast, the EIA showed an increase from the previous week in Weekly Products Supplied for U.S. Gasoline, up 1.9 percent from the week ending December 29, 2017. The lack of demand in PADD 1B amid the winter weather will likely show up in the EIA weekly data for the week ending January 12, as EIA Products Supplied is calculated based on changes in primary supply sources, rather than actual downstream consumption.

In general, gasoline rack activity in PADD 1A and PADD 1B dropped considerably on January 4-7 amid the winter storm and drastic drop in temperatures that followed, then recovered on January 8 as conditions improved (see chart). Thursday is typically the most robust day of the week for gasoline rack activity, and the inclement conditions caused a significant drop in gasoline demand year-on-year on January 4, with PADD 1A gasoline rack activity 43.2 percent below 2017 levels and PADD 1B gasoline rack activity 20.8 percent below 2017 levels, according to Genscape’s Supply Side Time Normalized Data. Year-on-year gasoline demand for PADD 1A and 1B remained weak until January 8 (see chart).

PADD 1A and PADD 1B Gasoline Demand

Conclusion – Checking the Forecast

Although the first significant freeze of the season is typically the most impactful, severe weather can still affect production and logistics in the field as the winter progresses. Operators are bracing for another round of harsh temperatures this upcoming weekend (January 12-14), with North Dakota expected to see temperatures below the negative 20 degree Fahrenheit mark, and West Texas projected to also drop below freezing. As a cold winter unfolds, Genscape will continue monitoring crude production, storage inventories, transportation flows, refinery operations and refined products demand to provide clarity on the impacts of extreme seasonal weather on the oil supply chain.

Genscape’s gas groups also saw widespread disruptions with freeze-offs reaching record highs. In a blog posted on January 9, our gas teams noted freeze-offs knocked out nearly 5 Bcf/d of U.S. production. During a 14-day period starting right after Christmas, a record cumulative 29 Bcf of production was frozen off. This came at the exact same time that temperatures fell to record lows in many markets, driving gas demand to record highs. Collectively, this sent localized gas prices (particularly in Midwest and Northeastern markets) to record highs as well.  

Genscape's U.S. Crude Oil Production Forecast shares exceptional accuracy and advanced notice of market fundamentals. This includes detailed oil production forecasts and frequent quick updates on production forecast taking into account gas and crude oil price changes. To learn more about Genscape's U.S. Crude Oil Production Forecast please click here.

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