The Fuse

Hurricane Harvey Takes Aim at U.S. Refining Sector

by Matt Piotrowski | August 29, 2017

Hurricane Harvey struck parts of Texas over the weekend and more rain is expected throughout the first part of the week, wreaking further havoc on communities, responders, and businesses. The devastation on the Texas coast has garnered the nation’s attention and will continue to do so as emergency rescues occur, floodwaters recede, and the area begins its recovery. It will be awhile before we know the magnitude of the devastation along with the personal and economic toll.

The storm has also inflicted significant harm on the U.S. energy industry. Harvey’s effects on the nation’s energy infrastructure are wide-ranging, forcing a large swath of refining capacity to shut.

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Spot gasoline prices soared by nearly 7 percent in response to reports that almost 3 million barrels per day of refining capacity, or roughly 16 percent of the country’s total, went offline. Some companies meanwhile had to shut pipelines, while some 800,000 b/d of crude output in the Gulf of Mexico and the Eagle Ford shale area had to be taken offline. But plummeting demand for crude as a result of shut refineries has kept oil prices in check and pushed NYMEX WTI below $47 per barrel on Monday.

Simply put, Hurricane Harvey means less gasoline but an increase in crude inventories.

U.S. motorists will likely see prices rise at the pump in coming weeks. How long they remain elevated depends on the extent of refinery damage, how swiftly refiners can restart their plants, the direction of fuel demand, and the amount of refined products that the U.S. imports. The good news for consumers is that the U.S. remains relatively well-stocked and plants outside the Gulf Coast will likely increase their gasoline production to help meet demand. Europe will also be incentivized to send excess fuel supply to the U.S.

Most of the refinery shutdowns over the weekend were preventive measures and some refineries are reportedly expected to restart as early as this week—but the continued rainfall and the possibility of flooding could bring about permanent damage to some facilities. Even if lasting damage does not occur, electricity outages, worker shortages, and limited infrastructure to move refined products to market could continue to hamper operations.

Since the early 1990s, there have now been 11 major storms that have disrupted oil and gas operations in one way or another. Since 2005, Harvey marks the eighth.

Energy companies operating on the Gulf Coast, where the refining industry and offshore production are concentrated, are no strangers to disruptive storms. Since the early 1990s, there have now been 11 major storms that have disrupted oil and gas operations in one way or another. Since 2005, Harvey marks the eighth. Back in 2005, when Hurricane Katrina shut roughly 20 percent of the nation’s refining capacity, most plants resumed operations within one to two weeks, but some remained down for an extended period. Gasoline prices soared at that time, but by a couple of months later, they had collapsed amid tumbling fuel demand, a surge of imports from Europe, a crude release from the Strategic Petroleum Reserve, and refineries outside the Gulf Coast churning out higher-than-expected volumes. Even though market dynamics may not play out in the exact same way they did 12 years ago, Katrina’s aftermath may be the most comparable to what we’ll see after Harvey.

Even an area as resilient as the Gulf Coast has been shocked by the devastation this week, and the region and the country will see knock-on effects for some time.

On the crude production side, Gulf of Mexico offshore outages were relatively minimal and did not exceed 500,000 barrels per day. Some offshore rigs started again once the storm passed, but tankers bringing imported crude will likely be delayed because of the storm and refinery outages. Once they make it onshore, though, more crude will hit the market all at once.

Even an area as resilient as the Gulf Coast has been shocked by the devastation this week, and the region and the country will see knock-on effects for some time. Likewise, the country’s oil and gas sector will be in flux as it looks to recover and stave off as much economic damage as possible.

Editor’s note: Our thoughts are with the people of the Texas coast and we wish the region a swift and safe recovery. 

 

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