US Oil Markets Start To Feel Impact Of Winter Storm Disruptions

Frigid weather sweeping across much of the US is starting to freeze oil and natural gas wells, threatening to disrupt production from North Dakota to Texas.

Crude output in North Dakota's Williston Basin declined on Friday by roughly 7%, or 80,000 to 110,000 barrels a day, as temperatures dropped to as low -16F, with forecasts calling for -29F on Saturday night.

The Permian Basin of West Texas and New Mexico, which pumps almost seven million barrels a day, also is at risk as sleet, snow and subfreezing temperatures are forecast through Monday.

"If you look at previous freeze-off events, we usually lose two to three million barrels a day and this event looks like three days," said Scott Shelton, an energy specialist at TP ICAP Group Plc, adding that any impact should be manageable given the size of the global market.

North Dakota is particularly vulnerable to prolonged cold snaps, which can shut in wells and slow restarts even when temperatures recover. Last month, a cold snap knocked out about 50,000 to 80,000 barrels a day of production, while a freeze last February halted as much as 150,000 barrels a day.

Physical crude prices in North Dakota are showing early signs of tightening, with Clearbrook barrels strengthening to a 60-cent discount to West Texas Intermediate on Thursday from 95 cents a day earlier, according to Modern Commodities.

While global oil supplies are ample enough to absorb brief weather-driven disruptions and refinery processing rates, prolonged outages could roil regional markets and strand barrels if pipeline operations are curtailed.

Pipelines in the the storm's path include the Centurion and Basin systems, which carry crude from the Permian Basin toward Cushing, Oklahoma, a key US storage and trading hub. The Basin line is owned by Plains All American Pipeline LP and the Centurion System is operated by Energy Transfer LP.

The companies didn't immediately respond to requests for comment on storm preparations and potential changes to operations.

Past winter storms show how cold weather can hit oil output, though the Permian region may be better prepared this time. During Winter Storm Uri in February 2021, oil production in the region fell an estimated 15.8%, according to East Daley Analytics, even as output recovered in the months that followed.

Texas Railroad Commission Chairman Jim Wright said the state has since improved its preparedness, including by increasing natural-gas storage at power plants.

"I'm very confident that we're going to be in very good shape," Wright said. "We've increased our storage on natural gas today by one third."

Despite the risk of freeze-offs, physical crude prices in West Texas have softened. The WTI Midland discount to Cushing widened to about 74 cents a barrel on Thursday, weakening from earlier in the week, according to data compiled by Bloomberg.

The move suggests traders may be more focused on the risk of reduced refinery demand from cold-weather disruptions than on immediate supply losses in the Permian Basin.

Refinery utilization slipped about 2% in recent days, raising concerns that extreme cold may impact crude supply and processing capacity at the same time. US refiners are taking precautions, with some facilities running at reduced rates due to the cold, Reuters reported.

Natural gas markets have reacted more sharply. Energy Aspects estimates the storm may cut tens of billions of cubic feet of US gas output over the next two weeks as water freezes inside pipelines, pushing prices higher.

Source: Bloomberg Europe