So far, Hurricane Harvey has generated an expectedly bearish influence on the market as the storm’s demand-destructive elements have kept pace with the production declines. However, Harvey’s landfall and generation of record levels of rainfall in South Texas could flip the storm’s impact to bullish, should the onshore production impacts outlast the demand destructive elements.
Total production is down about 2.4 Bcf/d since last week: about 1.3 Bcf/d from offshore areas plus roughly 1.1 Bcf/d from onshore. The bulk of the production declines are concentrated in the Eagle Ford of South Texas, but extend into the offshore Gulf of Mexico and Louisiana. Texas volumes are down about 0.98 Bcf/d from last week, with about 0.73 Bcf/d of the declines occurring in South Texas. For timely updates on production impacts from this storm reach out to natgassales@genscape.com to receive our daily Hurricane reports.
It is worth noting the risk to our estimate of offline production is likely to the low side. The actual number could very well be higher. Estimating actual Texas production on a timely basis is extraordinarily difficult given that our pipeline sample covers roughly 30 percent of actual production and the preponderance of volumes that move on non-transparent intrastate systems.
Genscape estimates demand in the EIA South Central region to be down about 0.7 Bcf/d from the storm. The demand declines are largely concentrated in South Texas spanning the Houston, Beaumont, and Corpus Christi areas. The storm has brought substantially cooler temperatures to the region, high winds triggering power outages, and record rainfall that is killing consumption in the less weather-sensitive industrial demand sector. East Texas weather-correlated demand has averaged 2.5 Bcf/d over the past week, but has fallen roughly 0.5 Bcf/d to 1.93 Bcf/d this weekend. Louisiana demand averaged 3.5 Bcf/d prior to the storm, then shed 0.3 Bcf/d during the weekend.
Genscape's ERCOT Power Market Analysts have noted there are roughly 253,000 customers without power. Genscape monitors indicate that generation at two power plants along the coast amounting to 1.5GWs has seemingly come offline due to the storm.
Genscape's Oil Market Analysts have noted public reports of about 3267 thousand barrels per day (bpd) of refinery capacity either offline or at reduced levels across 11 refineries.
Timely demand estimates are available via Genscape's Natural Gas Analyst data platform and Daily Macro S&D Report.
Genscape would like to apply the same caveat to demand-side estimates that we provide with production estimates. Estimations are difficult due to poor samples within Texas. In addition, storms are accompanied by changes in temperature which can result in weather-related shifts. There are also the non-weather impacts (those not from a direct demand-to-degree day perspective) such as closed schools and businesses, evacuated homes, or other.
Rounding out the demand picture is the resultant drop in exports to Mexico and risk to LNG exports. Exports to Mexico have plummeted to a three-month low at just under 3.4 Bcf/d, a 937 MMcf/d reduction from pre-storm levels. All of the declines are out of South Texas and triggering power price spikes in northeastern and central Mexico. Since Permian/West Texas production is being less impacted, Waha, Arizona, and Southern California exports to north-central and northwestern Mexico are relatively unaffected. Near-real-time monitored exports are available via Genscape's Mexico Natural Gas product suite.
While LNG cargoes have been halted, pipe deliveries to Sabine continue unabated but may reach limits of storage. Pipeline deliveries to Sabine are actually up, having averaged 2.19 Bcf/d since August 25 versus 1.84 Bcf/d in the 14 days prior. Since the weather-related disruptions to LNG operations are focused on ship loadings, those pipe volumes are moving into storage. Genscape estimates there is about 12 Bcf currently in storage. At those levels of storage and pipe flows we expect liquefaction can continue for approximately three more days if no cargoes leave. If storage fills up, and ship loadings are still delayed, liquefaction operations may need to shut-in. There is also shut-in risk in order to ensure worker and facility safety. Near-real-time monitoring of Sabine operations is available via Genscape’s North American LNG Supply & Demand report.
As of August 28, Harvey has had a bearish influence on prices, as has become the norm with Gulf-region storms over the past decade. In recent years, Gulf storms have had a larger impact on demand than supply. At the same time U.S. production gradually migrated to liquids-rich, higher-return onshore plays, demand along the Gulf Coast has grown, making storms more about demand-destruction. In 2005, Hurricanes Katrina/Rita temporarily shut-in ~8 Bcf/d of demand and permanently destroyed ~1.7 Bcf/d of demand. Hurricanes Gustav/Ike in 2008 temporarily shut-in more than 7 Bcf/d of demand and around ~1 Bcf/d was permanently destroyed.
With offshore production having fallen from over 10 Bcf/d just prior to Katrina to around 3 Bcf/d today, the market has correctly come to view hurricanes as bearish “demand killers”. The days of natural gas price spikes driven by hurricanes in the Gulf are long gone, and last week was a good example as the September contract settled unchanged week-over-week at $2.89 despite surprise development of a major hurricane in the producing area of the GOM.
That said, Harvey could be different and may flip to a bullish event. Demand can typically recover more quickly than production. On the demand-side, businesses and industrial sinks are already re-opening as evacuation orders are lifted. For example, all six major oil refineries in the Corpus Christi area shut-down, one is already back online and the remainder appear likely to come back soon as they were mostly out of harm’s way. Power burns should also rise with restoration of service and temperatures climbing back to seasonal norms with the storm’s departure.
However, production could remain offline for a much longer period. Like a heavy blizzard in the Rockies, the record amounts of rainfall hitting Texas may inhibit a quick production recovery by rendering some production sites inaccessible for a prolonged period of time.
Genscape's Meteorology group is noting exceptional rainfall continues to hammer Houston, but gradual clearing begins this evening around Corpus Christi. Harvey has been downgraded to a Tropical Storm and continue to weaken tomorrow. However, while the system shifts ever-so-slightly eastward, it is relatively stable nature will continue producing record breaking rainfall and exceptional flooding along the coast. The Corpus area is forecast to get nearly 50 inches of rain (the area’s average annual rainfall is around 30 inches), heightening the chances the production impacts and recovery could be prolonged.
Genscape's Natural Gas Team is currently tracking progress of Hurricane Harvey and providing timely alerts as events happen. To receive the updates, please contact natgassales@genscape.com