Port Fourchon, Louisiana, home to marine and equipment suppliers to offshore oil producers, was closed to vessel traffic as was the Louisiana Offshore Oil Port (LOOP), the only U.S. deepwater port that can handle very large crude carriers (VLCCs) for oil imports and exports.

New Orleans, Plaquemines, Cameron, Lake Charles and Houmaports remained closed on Wednesday, the U.S. Coast Guard said, tying up fuel, soybean and grains headed for export. Francine’s rains could threaten the region’s cotton crop, agriculture officials said.

Six eastern Louisiana refineries, most around New Orleans, were operating with minimal staff to ride out the storm in the plants. Exxon Mobil’s Baton Rouge refinery cut output to as low as 20% of its 522,500 barrel-per-day (bpd) capacity in preparation for Francine’s landfall.

U.S. crude oil climbed as much as $2 a barrel on Wednesday, driven by fears of lengthy production shutdowns in the offshore oil patch as Francine barreled through.

About a quarter of all oil and natural gas production in the U.S. Gulf of Mexico was offline on Tuesday, according to the offshore regulator. A total of 130 production platforms and two rigs had been evacuated.

Francine was moving northeast on Wednesday with maximum sustained winds of 90 mph (150 kph), the U.S. National Hurricane Center said. A faster motion is expected later in the day. Its center is expected to move across Mississippi on Thursday.

The storm is expected to bring heavy rainfall and the risk of considerable flooding across southeastern Louisiana, Mississippi, far southern Alabama and northern Florida.

Louisiana Governor Jeff Landry and U.S. President Joe Biden declared state of emergency for Louisiana.

The hurricane could spare liquefied natural gas plants recently built or expanded near the U.S. Gulf of Mexico, which is home to about 15 per cent of U.S. oil production and two per cent of natural gas output. The storm track was further east than many of the coastal plants.

Texas relieved

As the hurricane moved north along from Texas coast, some ports that had closed to vessel navigation earlier this week including Beaumont, Port Arthur, Sabine and Brownsville began post-storm assessments in preparation for reopening, the Coast Guard said.

Francine has disrupted crop shipments to the Mississippi Gulf region, responsible for about 55 per cent of U.S. soy exports, said Mike Steenhoek, executive director of the Soy Transportation Coalition, an industry group.

“The barge companies are not directing their barge flotillas to go down into that area until the storm exits the region,” Steenhoek said.

Francine’s ultimate impact will depend on how severe the storm is, Steenhoek said. While hoping for minimal disruptions and damage, traders also are watching to see whether Francine brings needed precipitation to the Mississippi River at a time when low water levels have slowed grain transportation.

Farmers in the central Gulf Coast region and the Mississippi Delta were preparing for the storm’s arrival by harvesting crops, including rice and soybeans, where possible, the U.S. Department of Agriculture said in a weather report.

Much of the region’s cotton crop is vulnerable to damage from rain and winds as their bolls are opening, USDA said.

—Additional reporting for Reuters by Sherin Elizabeth Varghese

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Marine fuels containing no more than 0.5 per cent sulphur by weight, down from the 3.5 per cent currently used, to power ocean-going vessels will be required for ships without exhaust scrubbers on Jan. 1, under the International Maritime Organization (IMO) 2020 standard.

In addition to the 0.5 per cent-sulphur fuel, called Very Low Sulphur Fuel Oil (VLSFO), shippers can use marine gas oil with a sulphur content of 0.1 per cent to replace marine fuel containing 3.5 per cent sulphur, called High Sulphur Fuel Oil (HSFO).

Some analysts expect a sizeable price jump as ocean shippers and fuel sellers begin stocking up, but warn existing refining capacity could fall short. Demand for bunker fuel was 3.5 million barrels per day (bpd) in 2018.

“The industry is not ready,” said Kurt Barrow, an IHS Markit consultancy vice-president, who forecasts a “sizeable” price increase for diesel.

“You’re not going to build enough new refining equipment nor add enough scrubbers” to meet initial requirements for VLSFO, he said.

The U.S. Energy Information Administration (EIA) said in report in March that shift in petroleum product pricing may begin as early as mid- to late 2019, with the effects on prices to be most acute in 2020, and then to moderate after that.

The average spot U.S. Gulf Coast ultra-low sulphur diesel (ULSD) prices for bulk orders could reach over $2.12 a gallon in the second half of this year and rise above that level in 2020, according to the IHS base forecast, Barrow said (all figures US$).

On Monday, the Gulf Coast spot market price for ULSD was $1.778 a gallon. The average spot price for U.S. Gulf ULSD in the first five months of this year was $1.926 a gallon, according to Refinitiv Eikon.

IHS’ forecast also expects the spot price of global crude benchmark Brent to reach an average above $67 a barrel between June and the end of this year. On Monday, the spot market price for Brent in London was $65.81 a barrel.

The spot price is for immediate delivery of a commodity, in contrast with the more-often quoted futures price, which is for a specific delivery at a future date.

The price rise will benefit refiners that have spent billions of dollars gearing up for the change. Plants that can maximize output of low-sulphur fuels such as marine gas oil “could see their margins surge,” according to a Boston Consulting Group report released last month.

It forecast high price spreads for IMO 2020-complaint fuels over sulphur-rich fuels lasting 18 months in two of its three uninterrupted conversion projections.

Net cash margin per barrel may climb over $10 in 2020, from about $3.80 a barrel now, IHS’s Barrow said.

Price increases could moderate, especially if the U.S.-China trade dispute weakens economic growth. Bank of America analysts, who this year projected refiners could see a $25 a barrel diesel margin in the fourth quarter from IMO 2020-compliant demand, now say the U.S.-China trade war “threatens to derail” that robust forecast by depressing economic growth.

Bonanza for some refiners

Analysts forecast demand for IMO 2020-compliant marine fuel should reach between 1.6 million bpd and 2.7 million bpd as shippers begin loading storage tanks and clearing vessels of existing bunker fuels.

Over the past several years, refiners have invested $100 billion to produce low-sulphur fuels, said Susan Grissom, chief industry analyst at trade group American Fuel and Petrochemical Manufacturers (AFPM).

Chevron Corp. and Marathon Petroleum, the largest U.S. refiner, this month said they are ready to supply IMO 2020 fuel. Chevron now has fuel available for testing, and will have continuous supplies in the market by late September.

The potential IMO 2020 bonanza has lured investors ArcLight Capital Partners and Freepoint Commodities to pour $1.4 billion into an idle St. Croix, Virgin Islands, refinery, to process 200,000 bpd of crude, and begin supplying the marine fuel by late this year.

U.S. refiners operating complex plants with hydrocrackers and hydrotreaters that remove sulphur from distillates are positioned to profit from selling IMO 2020 fuels, analysts at Tudor Pickering, Holt and Co. (TPH) said in a March report.

Demand for low-sulphur fuels could double earnings in 2020 from 2017 levels for complex refiners like Marathon and Valero Energy Corp, TPH said.

Such companies are “probably best positioned for the change” to low sulphur-fuels, said Gabriel Collins, a fellow in energy and environmental regulatory affairs at Rice University’s Baker Institute for Public Policy.

“There is a lot of optionality because of their complexity,” said Collins.

— Erwin Seba is a Reuters correspondent in Houston.

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The storm swung back over the Gulf of Mexico on Monday and was expected to bring another 10 to 15 inches of rain to the Houston area and up to eight inches as far east as New Orleans, the National Weather Service said.

Marathon Petroleum’s Galveston Bay refinery in Texas City, Texas, cut production by half, sources familiar with plant operations said.

Lyondell Basell Industries’ Houston refinery early on Monday also cut output by half to conserve crude supply, other sources said.

Meanwhile the nation’s largest plant, Motiva Enterprises’ 603,000-barrel-per-day (bpd) Port Arthur, Tex. refinery was considering shutting due to high water on the plant grounds and running with essential personnel only, two sources said.

The profit that refiners make per barrel of gasoline jumped as high as 21 per cent in the first trading day following Harvey’s landfall near Corpus Christi, Tex., late on Friday, as fears of short supplies gripped the market.

Gasoline for immediate delivery in the Gulf Coast hit five-year highs, traders said, while U.S. gasoline futures jumped as much as seven per cent to US$1.78 per gallon, the highest since late July 2015.

In total, 2.45 million bpd of U.S. refining capacity was shut due to Harvey, which knocked out four refineries in South Texas before bringing flooding rains to plants near Houston.

Nearly 19 per cent of oil production in the Gulf of Mexico has been shut, the U.S. Department of the Interior said on Monday.

The latest refining cutbacks were at Marathon’s 459,000 bpd plant and Lyondell’s 264,000 bpd Houston plant.

Marathon spokeswoman Stefanie Griffiths declined to comment. Lyondell and Motiva did not reply to requests for comment.

Oil prices fell as the refinery closings reduced demand, with U.S. crude futures dropping by more than three per cent on Monday.

Among other Gulf Coast refiners, Exxon Mobil’s 362,300 bpd Beaumont, Tex. refinery has cut production, the company said. It did not provide additional details. Earlier, Exxon halted production at its 560,500 bpd Baytown, Tex. plant.

Valero Energy’s 335,000 bpd Port Arthur refinery is running at or near maximum capacity but contending with flooding in the plant, sources said on Monday. Valero confirmed the plant is running, but has not commented on further.

Total SA’s 225,500 bpd Port Arthur refinery is operating normally, sources said.

In the area where the storm first hit, Citgo Petroleum’s refinery in Corpus Christi is preparing to begin its restart process as early as on Wednesday, sources said. A spokesperson did not reply to requests for comment.

Two other refiners who shut plants in the region, Valero and Flint Hills Resources, did not respond to requests for updates on their operations there.

— Reporting for Reuters by Erwin Seba, Catherine Ngai and Jarrett Renshaw; writing by Gary McWilliams.

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