Hurricane Harvey made landfall in the US on Friday 25th August, battering the Texan coast with 130mph winds. The flooding and physical damage which ensued dominated energy sector news headlines around the world. With domestic and international energy markets continuing to be disrupted, the focus is now on whether or not Hurricane Harvey is going to leave a permanent mark on the world’s energy sector.
The impact of Hurricane Harvey across the energy industry has been extensive, with the supply and demand disruptions inflicted on oil, gas and diesel have resulted in an extremely volatile period.
Oil & Gas
Offshore oil and gas production was spared the brunt of the storm as Harvey passed to the west of most of the Gulf’s offshore rigs. However, it wasn’t all good news for producers. Offshore production had to be purposefully wound down as a result of the severely reduced onshore refining and distribution capacity. Onshore shale production also found itself in the same position as a result of reduced downstream demand with LNG processing activity reduced by up to 2bn cubic feet per day. Decreased demand from power plants as a result of depleted residential and business usage also contributed to the reduction in demand.
As a result of reduced refining capacity, pipelines which feed refineries with crude oil were also subject to restrictions. TransCanada’s Gulf Coast pipeline, which feeds Texas with crude from Cushing, Oklahoma, was one such pipeline. It had to reduce throughput to a maximum capacity of 700,000b/d, a 100,000b/d reduction from normal operating capacity.
Futures markets began anticipating Harvey’s impact as it became clear the storm was heading for Houston’s petrochemical industry. Before the storm made landfall, the price of both WTI and Brent edged upwards with WTI rising 0.86% to $47.82 and Brent rising by 0.92% to $52.52.
Once Harvey made landfall, the market effect was even more prominent with the Brent-WTI spread reaching its widest level in 2 years. Demand for crude oil linked to WTI declined with refineries in Texas going off-line. As a result, demand and competition increased for Brent, with cargoes from Europe being sent to Mexico and Latin America, whose crude imports normally come from the US Gulf. This, compounded by North Sea maintenance which restricted the supply of European oil and gas, pushed Brent to an almost $6/bbl premium.
Diesel & gasoline
Hurricane-induced flooding forced a third of the US’s refining capacity to be wound down, equivalent to a 2m barrels per day reduction in refinery throughput. The closure of refining facilities consequently led to reduction in the supply of gasoline, diesel and jet fuel, which the US east coast depends on.
The issue of restricted supply was further compounded by disruptions to the Colonial Pipeline. The pipeline normally supplies more than 2.3m barrels per day of diesel, gasoline and jet fuel to the US east coast, but had to temporarily shut as a result of safety concerns.
The result - RBOB Gasoline Futures surged above $2.00/gal for the first time in 2-years. Although this was bad news for consumers, those refineries which were able to remain in operation were able to benefit from profit margins of $24 a barrel, the best margins in over 2 years.
The impact of restricted US supply of refined crude products also triggered an international response. Foreign refiners, including those in Asia, moved to capitalise on soaring refining margins, by ramping up output enabling them to export refined products to the struggling US market.
So now what?
Although the worst of the storm has passed, the impact of the Hurricane Harvey on the world’s energy markets wont just disappear overnight.
Markets continue to react with this week already seeing a 3.2% retreat in RBOB gasoline prices, following the restart of several refineries. WTI has now rebounded back to over $52 a barrel, as demand from the newly restarted refineries gradually increases. This has largely closed the Brent-WTI spread with Brent now trading at just a $1 premium.
Although platforms and rigs may have been spared from any physical damage, the ports and pipelines which production facilities rely on, were not so fortunate. The sustained closure of this infrastructure has resulted in the US government approving the release of 1m barrels of crude from its emergency stockpile, the Strategic Petroleum Reserve (SPR). This will supply refineries which are coming back online. The increased throughput from refineries will likely ease the price of refined products back down towards pre-storm levels.
The extent of the impact Hurricane Harvey has had on energy markets is causing many to question the structure of the US’s oil and gas production and processing industries, as well as its SPR. The SPR holds almost 680m barrels of government-owned crude in underground salt caverns between Texas and Louisiana, which is enough to cover a complete shutdown of US crude imports for around 3 months. But it stores just 2m barrels of refined products, only enough to meet around 2.5hrs of total US demand. The fact that no amount of SPR crude could solve the problem of restricted refined product supply is causing many to question why the US government doesn’t sell off some of its crude reserves to finance more large-scale gasoline and diesel storage.
The long-term damage caused by the storm and the flooding is yet to be fully assessed. Based on the current and forecasted situation however, it is likely that the impact on refinery operations, and in turn the supply of refined fuels, will be felt over the coming months. Whether the impact filters through to dent US growth as a result of a sustained reduction in consumer spending and increased unemployment, only time will tell.
But with Hurricane Irma now looming off the coast of Florida – there is a high chance that the US east coast and its energy markets are in for another round of stormy uncertainty.