By Shariq Khan and Nicole Jao
NEW YORK (Reuters) - A double whammy of record heat and hurricanes should test U.S. refiners' resilience in coming weeks, raising the risk of extremely volatile fuel prices in the middle of the peak travel season, analysts said.
The Atlantic hurricane season from June through November is an annual threat for U.S. refineries. Half of the country's over 18-million-barrel-per-day refining capacity is located along the Gulf Coast, highly susceptible to tropical storms. The U.S. is the largest fuel market in the world.
Refiners this year may have to brace for more storms than usual. Government forecasters expect up to seven major hurricanes in coming months, double the annual average of three major Atlantic hurricanes with wind speeds over 111 miles per hour.
Citgo Petroleum Corp was cutting output at its 165,000 barrel-per-day Corpus Christi refinery on Saturday and plans to run the facility at minimum during Tropical Storm Beryl's passage over the Texas Coast, sources said.
The largest ports in Texas also closed operations and vessel traffic in preparation for Beryl, which is expected to strengthen back to a hurricane before hitting the area early on Monday.
The intensity and timing of Beryl, which at one point became the earliest Category 5 hurricane on record, signals an active and disruptive season ahead, said Neil Crosby, crude market analyst at Sparta Commodities.
"Hurricanes remain the biggest wild card for gasoline prices," said GasBuddy analyst Patrick De Haan. "No better reminder of that than Beryl," he said.
Evacuation orders ahead of storms can lift stockpiling and boost fuel demand, causing prices for gasoline, diesel and other refined products to move higher, De Haan said.
If a major storm hits the Gulf Coast's refining system, it could remove as much as a million barrels a day of fuel supply and lead to extended outages or even permanent closures, according to the U.S. Energy Information Administration (EIA).
Hurricanes heading for the Gulf Coast could also knock out a similar amount of crude supply, with the offshore Gulf of Mexico region housing around 14% of U.S. crude output.
In 2021, U.S. oil and gas companies suspended more than 1.7 million barrels oil output in the aftermath of Hurricane Ida.
Outages of around 1.5 million bpd of crude production and refining capacity can cause gasoline prices to jump by 25 cents to 30 cents, according to EIA.
WARMER TEMPS
In addition to hurricanes, refineries this year must contend with more problems related to scorching heat.
The latest U.S. monthly temperature outlook foresees above average temperatures in large parts of the U.S. in July, typically the hottest month.
Excessive temperatures have supersized effects on commodity supply chains, including oil and fuel, JPMorgan (NYSE:JPM) analysts wrote last month.
Most refineries are designed to operate between 32 and 95 degrees Fahrenheit. Triple-digit temperatures could lead to equipment malfunctions and reduction in refining capacity.
Extreme heat last year led to a 500,000 bpd reduction in Gulf Coast refined products output, the JPM analysts wrote.
Similar effects are being felt this year. Unit upsets reported by Phillips 66 (NYSE:PSX) at its Wood River refinery in Illinois last month were likely due to heatwaves, according to Kloza and other industry experts.
SILVER LINING
A robust maintenance season earlier this year allowed U.S. refineries to undertake major upgrades and perform detailed upkeep which had been repeatedly postponed due to surging post-pandemic demand and supply disruptions.
That should, in theory, make refineries better prepared for the hurricane season, said Alex Hodes, oil analyst at brokerage StoneX.
Slow demand in recent months has also helped refineries build fuel stockpiles, which should act as a buffer in case of outages.
U.S. gasoline inventories have risen by about 4 million barrels since the beginning of April to near 231.7 million barrels by June 28, in line with the seasonal average of the past five years excluding 2020.
Inventories of distillates including diesel and heating oil have grown by 3.7 million barrels from the start of April and were at 119.7 million barrels by June 28, slightly below the historical average excluding 2020, when inventories were sharply elevated by COVID-related demand destruction.
"There's not much margin for error," said Tom Kloza, head of energy analysis at Oil Price Information Service. "I'm waiting to see what happens."