🔺 What to do when markets are at an all-time high? Find smart bargains, like these.See Undervalued Stocks

Hurricane Harvey Slammed U.S. Energy Sector; Impact Still Growing

Published 2017-08-30, 05:05 a/m
XOM
-
CHK
-
CL
-
NG
-
MPC
-
GPR
-
CQP
-

The city of Houston and East Texas in general continue to suffer from Hurricane Harvey, which hit the area on Friday and Saturday, and from the storm's aftereffects, including extreme flooding. The Houston area is the energy capital of the United States. Therefore, this humanitarian disaster has also become a major issue for the energy industry and energy investors.

Gasoline

Almost 3 million bpd of refining capacity has been taken offline within about a 300-mile radius of the Gulf Coast since the hurricane arrived. The nation’s second largest refinery, owned by ExxonMobil (NYSE:XOM), with a capacity of 560,000 bpd, is completely shut down. The nation’s largest refinery, Motiva, owned and operated by Saudi Aramco, is located nearby on the Louisiana border. On Tuesday evening, Motiva announcing it was shutting down production due to flooding. It is unclear when the refinery will reopen. The nearby Valero refinery also shut down production due to flooding. Some refineries in Corpus Christi are planning to resume operations next week.

The implications of this are extreme. At the time of this writing, 30% of U.S. refining capacity has been knocked out or impaired. It is now believed that a good portion of it is likely to remain offline for several weeks. Gasoline prices across the United States are starting to rise and will likely remain elevated for some time as Texas recovers.

This also draws attention to a vulnerability in the U.S. energy system that has been known for a while but largely ignored: U.S. refineries are overburdened and run nearly at capacity almost all all the time. There is little spare refining capacity in the U.S. system. In such a tightly balanced system any unplanned outage causes a cascade of rising gasoline prices throughout the region.

On the other hand, the impact will not be as immediate or as severe as it was in the aftermath of Hurricane Katrina in 2005, because the U.S. energy market does have relatively high gasoline stocks at present. For several weeks, EIA reports showed gasoline builds, which should help alleviate some of the impact from the refinery outages. In fact, this disaster will help curtail the buildup of gasoline storage.

Crude Oil

Oil prices are likely to remain depressed, as crude oil production was not significantly hampered by the hurricane. About 22% of offshore oil production in the Gulf of Mexico (about 379,000 bpd) was halted temporarily. Most of that is restarting.

Onshore production has also been impacted, with some oil producers halting operations in the Eagle Ford, including XTO (XOM) and Marathon (NYSE:MPC). (Marathon has since restarted operations.) Chesapeake Oil (NYSE:CHK) also announced it would reduce its production due to the refinery outages. We are likely to see additional reductions in shale oil production as producers realize there is nowhere to send the crude oil. On the other hand, if fracking and offshore producers do not cut production enough, it could exacerbate the glut of crude oil while refining capacity is limited. Expect to see crude oil prices fall further if producers do not curb their own production.

As a result of the refinery outages and port closures (Corpus Christi, Galveston, and the Houston Shipping Channel) tankers full of crude oil are sitting in the Gulf of Mexico unable to unload their cargo. Depending on how long it takes for these ports to reopen (Corpus Christi has some damage and the Houston Shipping Channel likely will have to be dredged of silt deposits from shoaling) this could keep crude oil prices depressed for some time.

However, in the long run, the backlog of imports may help draw down U.S. crude oil and gasoline stocks. In the long term, that might result in data that make the crude oil glut seem less severe. While prices dropped immediately following Harvey, there is a possibility that data in the coming months will lead to rising prices.

Other

LNG facilities, such as Cheniere Energy’s (NYSE:CQP) newly opened Sabine Pass facility, appear to have suffered only minimal damage.

Pipelines in the area carrying natural gas, gasoline, crude oil products, and crude oil were somewhat impacted. Several carriers took pipelines offline, and the Colonial Pipeline, which carries gasoline to the southeastern United States, was impacted by the storm. Service in several locations was disrupted.

The Strategic Petroleum Reserve, located in Freeport, TX (near Houston) has suffered damage from the hurricane. The government has said the facility is, “incapacitated.” This is likely temporary.

Traders should expect the data from the EIA regarding oil production and refinery runs to look very different in the coming weeks as this hurricane and the flooding that followed will continue to impact the Gulf Coast energy industry for some time.

Latest comments

Loading next article…
Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.