OPIS Global Head of Energy Analysis Tom Kloza joins Yahoo Finance’s Zack Guzman to discuss the threat Hurricane Laura poses to U.S. oil output, as the storm approaches Texas.
ZACK GUZMAN: Also want to highlight oil prices right now with crude trading about flat at $43.35 a barrel. Earlier, we got the EIA data showing a larger than expected draw, the fifth straight week of declines here in the US overall. The decline came in at about 4.7 million barrels. The estimates there were about 2.5 million barrels. So again, a larger than expected draw.
And of course, the reason why it looms so large is because we are watching as Hurricane Laura, a major category 3 storm, approaches the Gulf, set to hit the Texas Louisiana border later tomorrow morning. The storm, of course, category 3 right now, but forecast to strengthen to a category 4, which has many people fearing the damages that could come out of that on a scale that we haven't seen in a while. A lot of people fearing that it could be maybe not as bad, but close to the scale we saw with Hurricane Katrina.
And earlier this week, oil producers evacuated about 310 offshore facilities, also shutting about 1.56 million barrels per day of crude production. And joining us right now for more on the impact of all of that as we're watching the oil market trade again as we saw prices here hit, what we haven't seen since about March here as we approach $43-- top $43 a barrel. Joining us now for more on all of this, of course, is Tom Kloza, OPIS global head of energy analysis. And Tom, thanks for chatting on the phone with us today. I just want to first start by getting your take on what this means for the oil market, because when we saw Katrina hit years ago, we saw about a 90% outage of production in the Gulf. The shutoff here is only about 84% of offshore production, but obviously, we're dealing with a very different oil market today than what we saw back then. So how big of a deal is this storm?
TOM KLOZA: It's a big deal, but it's the first real of impact hurricane that hits in post-COVID environment. And let me see if I can put that in perspective. The combination of the oil supply war between the Saudis and the Russians earlier in the year together with the COVID demand destruction has created an incredible unprecedented oil glut. A lot of that glut is in the Gulf of Mexico states and a lot of it is in China.
So the loss of the off shore stuff, I mean, it's significant, and the safety demands that you want to evacuate those platforms. But it probably does amount to a whole hill of beans in terms of the price of WTI or the price of Brent. We've got plenty of crude. We're going to see refineries run less crude as they shut down either on a precautionary basis or hopefully, not from damage. And it's going to be a struggle for the crude oil prices.
ZACK GUZMAN: Yeah, that's been kind of a tricky play here. And we're thinking about the supply and demand equation because obviously, we've seen the demand destruction here tied to the pandemic. But also, on the supply front, we've seen those talks in OPEC and the rollback there, their production cuts. But the big swing factor here being US shale production. And when you think about that, I guess the question on demand would be we're getting to the end of the summer driving season once we get past Labor Day, so what is the demand side of the equation look like for the back half of 2021 or trying to estimate where crude goes from here?
TOM KLOZA: Well, we think that demand for gasoline, which is really the marquee product still, it's really been down about 15%. And that's after recovering from kind of a 50% haircut back during the lockdown phases. And there's a lot of reason to believe that one vacation driving ends, which largely it does probably with Labor Day, that we're going to see another demand slide, and we're going to continue to be about 15% or so below last year. That means the gasoline continues to be the unwanted hydrocarbon.
And to put this in perspective for you, when Katrina hit or when Rita hit or when Harvey, almost a cartoon-like storm, damaged the Gulf Coast, we were talking about $20 a barrel premium gasoline versus crude-- big, big refining profits. These days, refiners have had a dismal-- dismal driving season. And, you know, they may stabilize, but they're not going to be making a lot of money on the disadvantage refineries that might get knocked down. So we have so much refining capacity in our pocket now because of COVID that it's really a game changer for all of us.
ZACK GUZMAN: Yeah, I want to ask a little bit more about those refineries in just a second, but just to push back a little bit on the point of weak driving demand-- obviously, fewer people out there driving when we have the lockdowns in effects, but as those got lifted, is there any case to be made here that maybe that the busy summer travel season might linger a little bit longer here as we see continued reduction in the amount of people flying? As the holiday season approaches, I wonder how much of that might be boosted by more people opting to drive rather than flying through all this, and whether or not that by itself might be important to consider when you think about supply and demand here as we approach that season.
TOM KLOZA: I think you probably get a couple of bumps. You get a bump around Thanksgiving and you get a bump around Christmas. But in between the bumps, you have the issue of telecommuting. And all of the things that are going on there-- that people don't have to go back to the office until 2021, where they've got two days at work and three days off, it's amazing that we've had an awful lot of fans of congestion and sort of rooting for congestion on the roads, because that seems to be an indicator that we're in recovery.
But I think, again, that the game has changed. I don't think we'll ever get back to the gasoline demand triggers and the domestic demand numbers that we saw here in the United States in 2017, '17, '18, 18, and '19. I think that an awful lot of working from home and remote work, remote learning, disruptions in school-- we're not quite true when people are going to go back to recreational venues and so forth. That's going to linger, not just through the rest of the year, but I think in 2021.
The government suggests that demand for gasoline next year is only going to be down by about less than 1% from the last normal year, 2019. If that were a Vegas bet I'd take the under on that-- or the over, meaning it's going to be a much greater percentage decline without question.
ZACK GUZMAN: I mean, obviously, we've talked a lot about how this impacts the drillers or shale producers here in the US, but when we think about the rest of the stream there, talk to me a little bit more about those refineries, because when you talk about shale producers going bankrupt here-- Mizuho Securities talking about their predictions earlier this year as many as 70% of shale producers may go bankrupt. When we're thinking about the refineries here caught in between there, with oil at around $40, what does that look like for them now as they grapple with this storm and what impacts might come from that?
TOM KLOZA: Well, here's the other thing that's happened in oil beyond $40 and how it's impacted refiners. You know, for most of the shale oil boom years and even some of the bust years, it's been a big difference. You could buy-- as a refiner, you might be of will beat the WTI price by 10 or $15 barrel whether it be in the Bakken or whether West Texas or even at the Gulf of Mexico-- we've seen the homogenization of crude oil here in the last six months or so, where the price is very, very close to the price that you see on the screen for WTI, which is to say a lot of refiners don't get an advantage in buying.
And so that's created an environment where instead of getting double digit margins on products like gasoline or diesel or jet fuel, they've had to contend with low single numbers. And you can make a case for gasoline demand coming back, make a case for diesel demand coming back-- can't make much of a case for jet fuel demand coming back until mid-decade.
ZACK GUZMAN: And then today, I mean, obviously, as we're watching the storm play out with crude prices holding steady, we'll see what happens as again, we're talking about production getting shut off in a way that we haven't seen in about 15 years. But Tom Kloza, always appreciate you joining us to share your thoughts. Thanks again.
TOM KLOZA: Thanks for having me.