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.
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. It was feared that Motiva might be forced to halt its operations, but the refinery has decided to remain with limited production. Some refineries in Corpus Christi are planning to resume operations next week.
The implications of this are extreme. 16.4% of U.S. refining capacity has been knocked out (just over 3 million bpd) and 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.
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 and Marathon (Marathon has since restarted operations.) Chesapeake Oil 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.
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.
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.
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