Tropical Storm Projected To Hit The Louisiana Coast As A Category 1

A hurricane threat to the US energy hub along the Gulf of Mexico has oil and refined product futures trading modestly higher Monday after OPEC’s signal Friday that it would delay output increases wasn’t enough to prevent prices from falling to fresh multi-year lows.

After a historic break in storm formation, there’s about to be a hurricane pointing at the TX/LA border, home to several of the country’s largest refineries, as we reach the typical peak of the season. Tropical Storm Francine is expected to be named today, and is currently projected to hit the Louisiana coast as a category 1 storm with sustained winds around 80mph on Wednesday night.

Good news/Bad news with this storm is if it shifts further to the East, it will stay over open water longer, and be able to gather strength, but will also take it further away from the refineries clustered along the coast. As it stands this morning, the Houston/Galveston area refineries are outside of the storm’s direct path, while the Beaumont/Pt Arthur and Lake Charles areas are all still in the cone. Right now those key refinery clusters are on the clean side of the storm which should help them avoid the worst of the damage if the path holds.

The NHC is tracking two other storms moving over the Atlantic, both of which are given 60% odds of being named, but forecast models suggest they’ll stay out to sea and not be a threat to the US.

California markets continued to see strong differentials, with San Francisco spot CARBOB trading north of $1.05/gallon premium to futures, while CARB #2 ULSD values are hovering just below a 40 cent premium. Los Angeles spots have trailed the Bay for this most recent rally, but may soon be playing catchup after PBF reported multiple upsets at its Torrance refinery over the weekend.

No surprise that money managers were liquidating bets on higher energy prices during last week’s sell-off. The large speculators reduced length in all 5 petroleum contracts, although most of the selling was concentrated in WTI and Brent that saw a combined reduction of more than 100,000 contracts of net length vs only 16,000 for products. A big influx of new short positions accounted for the majority of the move in crude oil contracts last week, leaving big speculators once again vulnerable to a quick price spike just like we’re seeing today.

Baker Hughes reported no net change in the oil rig count last week, while natural gas rigs dropped by 1 to a fresh 3 year low.