While Tropical Storm Marco is no longer a threat, it’s sibling, Laura was upgraded Tuesday to hurricane status and is expected to hit the Texas-Louisiana border as early as later today.
It is the season’s first major hurricane and could hit Category Four as it approaches the Gulf Coast. Hurricane Laura has the potential to be the worst storm to hit the Gulf Coast oil industry since Hurricane Katrina in 2005, which rocked the U.S. oil industry.
The massive oil complex along the coasts of Texas and Louisiana were rapidly shutting down on Monday and early Tuesday in advance of storm system in the Gulf of Mexico that has onshore and offshore operators bracing.
Up to 90 percent of the Gulf’s daily crude oil production of 1.5 million barrels a day, and 57 percent of natural gas output (1.5 billion cubic feet per day) was offline as of Tuesday afternoon. The storms have also forced the evacuation of at least half of the crews on the oil and gas platform facilities in the Gulf as of midday Monday.
Hurricane Laura could make landfall somewhere between Houston and Lake Charles, Louisiana, either late Wednesday or early Thursday, with sustained winds of 115 mph and gusts up to 140 miles per hour, and a storm surge of 13 feet.The industry hasn’t seen a storm of this ferocity since Katrina.
The Gulf Coast is the heart of the U.S. refining system and the storm will impact some 40 percent of domestic refining capacity and close to 100 percent of the Gulf of Mexico crude oil production.
Refiners have halted processing at facilities that typically handle at least 1.8 million barrels a day, 10 percent of the nation’s total refining capacity.
Several massive facilities are in the Laura’s path, including Motiva’s 607,000 barrel a day Port Arthur, Texas, plant—the nation’s largest—as well as Marathon Petroleum
Motiva announced Monday that it was shutting its massive refinery ahead the hurricane’s impact. Valero also began a partial shutdown of its 335,000 barrels a day Port Arthur plant on Monday.
In all, roughly 8 million barrels a day in throughput capacity is at risk from Hurricane Laura’s trajectory.
Refiners that shut down ahead of the storm could require a week or two to resume operations, with that timeline potentially lengthening if the storm gathers strength.
Port closures are also important now that the United States is a substantial exporter of crude and refined products. So far, the major ports of Houston, Texas City, Galveston, Freeport, Brownsville and Corpus Christi remain open but that status could quickly change.
Ports at New Orleans, Baton Rouge, Venice, St. Bernard and Plaquemines in Louisiana are closed. Beside exports, these ports are key to supporting offshore exploration and production operations.
Also closed is a key artery for the petrochemical industry, the Gulf Intracoastal Waterway. Petrochemicals have remained a strong source of demand through Covid-19 crisis for the industry.
While upstream shut-ins provide support to oil prices, refinery closures would exacerbate demand weakness for crude from Covid-19. The net effect of a Katrina-like storm could be bearish for crude, but only time will tell. Pandemic demand weakness complicates matters, as global demand is running at about 88 percent of pre-virus level—around 88 million barrels a day vs. 100 million barrels a day.
Markets know that the hurricane shut-ins are usually transient, and it’s a bit too early to know whether the current ones will have a prolonged bearish effect on prices or not.
Refineries might need to shut-in more runs due to flooding than upstream operators shut in crude supply. This uncertainty is for the moment helping to keep prices steady, after providing some limited gains on Monday.
Overall, the hurricane may limit supply this week, helping prices maintain and even slightly hike their levels but the market will soon again focus on the biggest hurricane of them all, Covid-19.
The demand recovery is what will affect how prices move on the long term and indications of how the pandemic develops are what will really determine the direction of the market.