On Wednesday U.S. West Texas Intermediate and international-benchmark crude oil futures are trading lower after giving back earlier gains. Since weather concerns in Texas drove the market higher earlier in the session, I suspect that new forecasts calling for a break in the extremely cold conditions may be encouraging investors to book profits.
A stronger U.S. Dollar could also be driving down foreign demand for the dollar-denominated asset. A deep freeze kept the Texas energy sector in the dark for a fifth day on Wednesday, with Houston’s major shipping channel closed overnight and at least a fifth of U.S. refining output offline, according to Reuters.
About 500,000 to 1.2 million bpd of crude production has also been shut, including in the Permian, the largest U.S. oilfield, and it could be weeks before it is fully restored, industry analysts said. The cold snap, which has killed 21 people and knocked out power to millions of people in Texas is not expected to let up until this weekend.
Texas produces more oil and natural gas than any other U.S. state, and its operators, unlike those in North Dakota or Alaska, are not used to dealing with frigid temperatures. “A production rebound could potentially take more than a week or two for the majority of oil and gas wells, but it might take longer for production from nearly all wells to recover,” analysts at Citigroup wrote.
The Houston Ship Channel, which had opened for some vessel traffic during Tuesday, was shut again overnight. The 53-mile (85 km) waterway crucial to oil and fuel exports, has been closed since February 14. “We have 4-delayed incoming vessels, which is not much. The shipping channel is not operating at night time due to weather hazards and we are planning to open the channel in another 3 hours from now. Last night we had one order cancellation due to the weather,” a Houston Pilots dispatcher said.
Nearly 4 million barrels per day of refining capacity has been knocked out, Reuters calculations found. The cold has shut natural gas production and pipelines, which refineries use in power generation. Widespread power outages or instability of external power supply can force shutdowns.
This is a short-term event so chasing prices higher is risky. Here’s a good example of how volatile speculating in energy can be at this time. Electricity prices in Texas continued to surge, as utilities scrambled to meet heating demand. Next-day power on Wednesday at the ERCOT North hub, which includes the cities of Dallas and Fort Worth, spiked to a record of $8.800 per MWh, a nearly six-fold jump from $1,490 on Tuesday.