The power supply problem that initially plagued a few states in the United States is hitting the global oil market.
The US has halted production of more than 4 million barrels a day, close to 40 per cent of US crude oil production, according to traders and executives. One of the world's largest refining centers has slashed production. U. S. waterways for transporting crude oil overseas have been disrupted for most of this week.
"the market underestimates the reduced oil production in Texas due to bad weather," said Ben Luckock, co-head of oil trading at commodity giant Trafigura.
Brent crude futures rose to less than 25 cents from $65 a barrel on Wednesday, the highest level since January. Prices fell below $16 ten months ago because of the demand shock caused by COVID-19 's epidemic.
In the past, this kind of weather interference only affected the United States to a large extent. There is no doubt that it has become a global problem. The European crude oil market is rising as traders look for alternatives to US crude. OPEC and its allies must decide how long the cuts will last.
The forecast shutdown has become longer and longer in recent days, with analysts trying to figure out how long it will take for infrastructure to thaw, especially in areas where extreme cold weather is infrequent.
Increase in production loss prediction
At first, it was expected that US crude oil production would be hit for two or three days. Now it seems unlikely to start to recover before the end of the week.
This means that supply in the global market will fall even more. Citi expects to lose 16 million barrels of production by early March, but some traders are now predicting almost twice as much. In Permian basins, the heart of US shale oil production, a large amount of capacity has been shut down.
As a result, crude oil prices soared elsewhere. This week, North Sea traders went on a buying spree to find alternatives to U. S. crude exports. As European crude prices rise, Asian buyers are buying up Middle Eastern crude at a higher premium.
Although the overall price of crude oil futures is at its highest level in more than a year, prices have not risen higher because of the same heavy loss of refining capacity. The largest refinery in the United States has been closed, shutting down at least 3 million barrels of refining capacity per day. The scramble by traders to ship millions of barrels of diesel from Europe to the US may be good for the European refining industry.
Gasoline engine
"the Gulf Coast is like a gasoline engine, shipping products to the United States and international markets." Said Kitt Haines, an analyst at consulting firm Energy Aspects. "it could help the European refining industry, at least in the short term."
All this is causing Saudi Arabia and its allies to keep a close eye on the Texas weather forecast.
April production decision
OPEC+ has not yet decided on production plans for April, but Saudi Arabia's decision to cut additional production in February and March surprised the market. This means that there is spare capacity to start at a time when market demand is booming.
"the market has become like a wild animal that needs to be controlled by OPEC+," said Gary Ross, a hedge fund manager at Black Gold Investors LLC. "Weather conditions are having an incredible impact on global supply and demand."
But the temperature is about to warm up. Midland, the de facto shale oil production capital, will reach 7 degrees Celsius on Friday and 13 degrees Celsius on Saturday, and crude oil production will be able to restart. Temperatures in Midland fell to nearly-19 degrees Celsius on Monday, the lowest in more than 30 years.
A big unknown is how long it will take to fully restore production and other oil infrastructure in the region.
"judging from the extremely cold weather in the last Permian basin, it will recover soon," said Paul Horsnell, head of commodities research at Standard Chartered. "but refineries are more vulnerable to long-term damage."