U.S. Oil Industry Update: Still Reeling From Hurricane's Impact

It has been over a week since Hurricane Harvey made landfall on the Texas Gulf Coast, but the U.S. energy industry is still reeling from its impact.

Oil Production

According to the Bureau of Safety and Environmental Enforcement, 9% of oil production in the Gulf of Mexico (approximately 153,000 bpd) and 13% of natural gas production was still offline as late as Tuesday morning.

The Texas Railroad Commission estimated that up to 500,000 bpd of oil production from the Eagle Ford Shale region (about one third of output) was halted due to Hurricane Harvey. Producers in the Eagle Ford region were still assessing damage in the region over the weekend. Conoco (NYSE:COP) reported producing at 50% of its pre-hurricane capacity on 3 September but expected to return to full production by 5 September. Lingering flooding, inaccessible roads, lack of personnel, and access to the chemicals and sand needed for fracking are all concerns that continue to impact oil production in the region.

Some drilling was delayed as a result of Harvey, but only about 10%. Traders should keep in mind that much of last week’s crude oil production and likely a significant amount of this week’s oil production will end up in storage in Cushing, OK instead of on the coast for refining or export. As refineries and pipelines come back online, this backlog of crude oil will be moved, but the backlog could take weeks and perhaps months to fully resolve.

Gasoline

According to GasBuddy, gasoline prices across the United States jumped by an average of 27 cents per gallon this week, with Delaware seeing the largest increase of almost 50 cents per gallon. Gasoline prices will likely remain elevated for some time as refineries assess damage and resume production. About 30% of U.S. refining capacity was impacted by the storm. As of 4 September, about 17% remained offline.

Some refineries, like those owned by Valero (NYSE:VLO) in Corpus Christi and Texas City have resumed full operation, but others that were hit hard by flooding in Port Arthur are still offline. As of 1 September, Marathon Petroleum's (NYSE:MPC) refinery in Texas City was running at only 45% capacity. ExxonMobil (NYSE:XOM) began the process of restarting operations at the nation’s second largest refinery in Baytown, Texas on 2 September. The largest refinery in the U.S., Saudi Aramco’s Motiva refinery in Port Arthur, was flooded and, according to some sources, may be closed for two weeks (view pictures here). Other sources, however, say Motiva is in the process of restarting its hydrocracker and large crude unit.

Traders should expect the gap between gasoline and crude oil to remain greater than normal but to narrow in the coming weeks. There is also the possibility that gasoline prices may not fully return to their low levels pre-Harvey, even after the recovery is complete.

Transportation

The closure of the Colonial Pipeline had the greatest impact on gasoline supplies in the southeastern and mid-Atlantic regions of the United States. Colonial initially said it would reopen the segment of its pipeline between Houston and Herbert, TX, on 3 September, but it delayed that reopening. As of 4 September, only the diesel and jet fuel portions of the Colonial Pipeline had been reopened. Reports over the weekend anticipated that the gasoline portion would restart on 5 September. The Colonial Pipeline runs from Houston, TX to Linden, NJ with many spurs and offshoots carrying needed products for gasoline, diesel, and jet fuel to states across the region. Gasoline prices will remain elevated for much of the United States at least until the pipeline is fully reopened.

Ports in the region (Corpus Christi, Houston Shipping Channel, and Galveston) began reopening last week. However, access for large ships, like the VLCCs used to transport crude oil, was limited until 4 September. According to TankerTrackers.com, the backlog of tankers (250) floating in the Gulf of Mexico is beginning to decrease as the tankers are now entering ports in the region. Approximately 10 million barrels of crude oil were moved (both imports and exports) in 24 hours over the weekend.

Hurricane Irma

Another hurricane, this one called Irma, appears to be approaching the region. According to the U.S.'s National Hurricane Center, it's a category 5 "potentially catastrophic" storm. It's predicted to hit the Caribbean this week and potentially the United States over the weekend. Right now, forecasts expect landfall across Caribbean nations and in Florida, but not in oil producing regions.