Hurricane Harvey poses uncertainties for oil markets

Hurricane Harvey was barreling across the US Gulf of Mexico and towards the coast of Texas Thursday night local time, threatening major offshore oil and gas production and refining in the region, as well as imports and exports of crude and refined products. 

Harvey was expected to make a landfall as a Category 3 hurricane Friday night or early Saturday local time and the US National Hurricane Center had warned of “life-threatening inundation from rising water moving inland from the coastline.”

The Gulf of Mexico offshore area pumps about 1.66 million b/d or 17% of the total US oil output. Some 8.44 million b/d or 46% of the country’s refining capacity is located in the Texas and Louisiana Gulf Coast districts.

Terminals in the region process around 3.9 million b/d of crude imports (46% of US total) and about 700,000 b/d of product imports (31%) an well as handling around 2.7 million b/d of finished petroleum product exports (82%). 

Producers and refiners were scrambling to evacuate or shut down their facilities as a precautionary measure through Thursday night, while some continued to assess the situation, caught off-guard by the sudden strengthening of a storm that had disintegrated into a tropical depression as it crossed the Yucatan Peninsula earlier in the week.  

The last major tropical cyclone to hit Texas was Hurricane Ike, close on the heels of Hurricane Gustav, both in September 2008. Those resulted in 1.3 million b/d of oil production and just over 7 Bcf/day of gas production in the US Gulf being shut in as a precautionary measure. About 85% of oil production and 71% of gas production had been restored in the 12 weeks after Gustav hit. Refining capacity outage peaked at 4 million b/d, but was fully restored in less than six weeks after Gustav.

Hurricanes Katrina and Rita in August and September 2005 respectively were far more destructive and caused longer outages. They shuttered up to 1.5 million b/d of oil and up to 8.8 Bcf/day of gas production. Restoration of supplies occurred gradually from November 2005 through March 2006. Twelve weeks after Katrina struck, a little over 5 Bcf/day of gas and over 1 million b/d of oil production was still shut in.

Beyond the knee-jerk rise in crude and product prices early Friday to factor in the likelihood of oil-related supply disruptions in general, Hurricane Harvey will need to be watched closely over the next 48 hours for a more detailed assessment of the precise nature and likely duration of its impact. 

If the hurricane dissipates without causing any major damage to infrastructure and production and refining facilities, any capacity shut in as a precaution should be restarted fairly swiftly, enabling the crude market to return to “normal” within days. In the event of major damage to facilities, the impact could play out differently in the crude and refined products markets, depending on which infrastructure has suffered more. 

A major, drawn-out oil production outage would support crude prices, but would also be mitigated by the presence of increased spare capacity available among the 22 OPEC and non-OPEC producers that have restrained supply under their agreements since January, as well as the cushion of brimming oil inventories globally. 

If refineries in Texas are damaged and are forced to halt operations for a prolonged period, it would prop up refined product prices, while also pressuring crude down because of reduced demand for the feedstock, driving a rally in product cracks, or the premium of refined products over crude. 

Any major disruptions in the imports and exports of crude and products will need to be analysed carefully, for they could well cancel each other out in terms of the balance between crude and refined product supply available in the country. 

The market appeared more concerned about products than crude supply through the trading sessions in Asia and Europe Friday. The front-month September NYMEX RBOB gasoline contract changed hands at $1.7295/gal at 1300 GMT Friday, up 4% from Thursday’s settle, while WTI and Brent were up only 0.5% and 1% over the same period. The EIA Wednesday reported a 107,000 b/d rise in US gasoline demand to around 9.63 million b/d in the week to August 18, and a draw of 1.22 million barrels in gasoline stockpiles, supporting sentiment for the fuel amid the ongoing US summer driving demand season.

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