WTI, Brent Crude Rally

NEW YORK (DTN) -- New York Mercantile Exchange spot-month oil futures settled mixed Tuesday with West Texas Intermediate crude and Brent on the IntercontinentalExchange rallying to three-week and three-month highs, respectively, boosted by short-term crude demand by refineries that are restarting in Texas after being shut for about a week due to Hurricane Harvey.

Conversely, RBOB futures plunged to the lowest level since Harvey hit the Texas coast on Aug. 25, as operations along the Texas coast began to recover from the storm. The ULSD futures contract was little changed.

Harvey caused massive flooding that prompted the shutdown of several refineries and pipelines in the Houston and Corpus Christi areas, and spurred concerns about supply shortfalls.

The latest selloff for the RBOB futures contract reflects easing market concern over fuel supply, as oil refineries that restarted over the past several days are expected to increase their product output in the coming days.

"Gasoline is going down not only because refineries are being brought back online but also because they've got Hurricane Irma coming that could cause demand destruction again," said analyst Phil Flynn at Price Futures in Chicago.

Traders are keeping a close eye on Hurricane Irma. While still in the Caribbean, Irma is expected to strengthen into "an extremely dangerous Category 5 hurricane," according to the National Hurricane Center, and has the potential to hit the Gulf of Mexico, where offshore U.S. oil production is located. The current forecast is for the storm to reach southern Florida this coming weekend.

In Texas, recovery from the impact of Harvey is underway. Goldman Sachs bank said in a report today that 13% of U.S. refining capacity remains offline and that 1.4 million bpd of refining capacity would remain shut through mid-September.

However, according to the Department of Energy, eight oil refineries with a combined 1.8 million bpd or 9.6% of total U.S. refining capacity have begun the process of restarting as of Sept. 4, and at least four refineries in the Gulf region were operating at reduced rates, but none had returned to normal rates.

At its peak of outages about a week ago, 31% of the nation's refining capacity was knocked out and 21% of the Gulf of Mexico oil production was shut-in.

Floodwaters continue to recede in the Houston area and the Houston Ship Channel has reopened. Coast Guard sources said most of the backlog at the channel has been cleared, with only 12 ships waiting to offload their cargoes as of Tuesday.

Colonial Pipeline resumed service at the Pasadena and Houston origin points for its 1.056 million bpd main distillate line 2 on Monday, and for the 1.272 million bpd main gasoline line 1 Tuesday. Both mainlines 1 and 2 have operated intermittingly from the system's Lake Charles origin point in Louisiana east, with an embargo on service from all Texas origin points declared last week because of a lack of fuel to ship. An interruption of service continues at Colonial's Cedar Bayou origin point in the Houston area, and at the Hebert origin point, which collects supply from Beaumont and Port Arthur refineries.

ICE Brent futures were further supported by signs the Organization of the Petroleum Exporting Countries and their 10 non-OPEC allies could extended the timeline for their 1.8 million bpd in production cuts through June 2018. The NYMEX October RBOB futures settled 4.88cts lower at $1.6991 gallon, off a $1.6579 one-week low on the spot continuation chart. October ULSD futures were little changed, edging up 0.12cts to a $1.7480 gallon settlement, after trading at a $1.7736 26-month high spot high. NYMEX October WTI crude futures spiked $1.37 to a $48.66 bbl settlement, moving off a near three-week spot high of $48.98. ICE November Brent crude climbed $1.04 to $53.38 bbl at settlement, ending near a three-month spot high of $53.66. The trans-Atlantic arbitrage remains wide, with Brent closing trade at a $4.72 bbl premium to WTI.

George Orwel can be reached at george.orwel@dtn.com