Fundamental Forecast for USOIL: Bearish

Talking Points:

When the Crude Oil market is discussed, typically there is a conversation about the end user demand such as economic growth, and consumption demand with season peaks or the upstream effects. Upstream, which is oil and gas nomenclature for exploration and production, has been of keen interest over the last few years as US output and exporting has been at record levels, and is seen as a key reason why the price of Oil has been hesitant to break above $50/bbl.

Now, concerns are mounting about the refining of crude oil that is closer to the end-user (downstream), which is the refining of oil into usable products like gasoline. The problem is that after Hurricane Harvey, U.S. refining capacity is at a seven-year low, and there remains uncertainty around when the capacity to refine crude, which is still being produced aggressively, could pick up. The largest refiner in the US, Motiva, originally expected to be offline up to two weeks later said there is now no timeline for restarting their refinery in Port Arthur, TX which refines 603,000 barrels per day alone.

In short, Hurricane Harvey has transformed the global market for refined oil products. In addition to refining operations in the energy capital of the US (Houston, TX) remaining shut for an indefinite amount of time, there is an active port in Houston that takes Oil to the world (US exports have been a global dominating factor lately) that is inaccessible, and demand is uncertain. Some could argue the Broken Window Fallacy is good for demand. The theory argues demand is created from destruction, and thus Oil demand would benefit from the needed rebuilding. However, history tends to show that any gains are unevenly dispersed, and the economy as a whole is not better off with stronger demand than before.