The oil production disruption that extremely cold weather has caused in the US is moving the whole energy system today and that’s what supports the oil price rise.
The market seems to be reacting bullishly to the news that more Permian production is shut-in from the cold blast in the US than previously thought, and for longer.
However, the net effect on crude supply and refinery demand seems to be modest and close to net zero, justifying the price increase but also capping it.
The now-estimated up to 3.5 million bpd production shut-in peak nearly matches the upwards revised 3.6 million bpd in refinery capacity shut-ins, but the market may be anticipating that refinery capacity may return more quickly than well-head production.
Given the 3.6 million bpd refinery capacity shut-in, with refineries estimated to have recently run at close to 85% utilization, the actual peak crude demand loss could be in the 2.7-3.0 million bpd on the US Gulf Coast.
Gasoline prices relative to crude, the so-called gasoline crack, also continue trading higher, which suggests gasoline demand is not as severely affected from the extreme cold as the 3.6 million bpd refinery capacity.
The situation is still foggy and it will take a few days for the market to realize the actuality of the disruption on crude and products balances.
If temperatures rise slowly, some of the shut production can restart from the weekend, which would allow producers to start resuming flows by the end of the week – if they have power and at affordable prices too.
The disruption in US oil production is the largest on record, about one-third, which could have sent crude prices rocketing higher if refinery demand wasn’t equally bad hit.
In comparison, the largest ever global outage in production happened in September 2019 following the drone attack on the Abqaiq processing facility and Khurais oil field in Saudi Arabia, knocking 5.7 million bpd off the grid for a several days.
