Things could get a lot more complicated in the days ahead with a potentially catastrophic Category 5 hurricane barrelling towards Puerto Rico, Cuba, South Florida and maybe the Gulf of Mexico.
Hurricane Irma had sustained wind speeds of 180 miles per hour on Tuesday, which appears to be one of the strongest hurricanes ever recorded in the Atlantic. It is likely Hurricane Irma could be slamming directly into South Florida by the weekend.
Irma’s effects on the energy sector would be felt pretty much only on the demand side of the equation. Florida has little to no supply-side infrastructure – negligible levels of oil production and refining capacity. There is a very remote chance it will travel into the Gulf of Mexico, which would have huge implications for the region’s offshore production – most weather models have the hurricane shifting north up along the East Coast.
Hurricane Harvey, however, is said to have disrupted more than 2 million barrels per day of refining capacity, with major refineries restarting operations in Corpus Christi and Houston. ExxonMobil is ramping up operations at its Baytown facility, the second largest in the country. Valero Energy brought two refineries in Corpus Christi and Texas City back online, with another large one in Port Arthur scheduled to resume operations soon.
The massive Motiva refinery – the largest in the country with 600,000 bpd of capacity – is still offline, but is getting closer to resuming operations. The large volume of restarts led to a spike in crude oil prices on Tuesday, with WTI up more than 3 percent. Gasoline futures fell back as the Colonial Pipeline restarted shipments.
Goldman Sachs predicts that as of Thursday, half of the shuttered refining capacity will have resumed. But what about the rest? An estimated 1.4 million barrels a day could remain offline through mid-September at least, the investment bank predicts.
Goldman says the lingering effects will be “modestly bearish,” projecting a 40-million-barrel increase in crude oil inventories. But the quick comeback of some larger refineries led Goldman to lower its projected demand impact from 750,000 bpd in the first month after the storm to just about 600,000 bpd.
Goldman also raised the possibility that the comeback in shale production could be curtailed by the sustained outages at Gulf Coast refineries, a scenario that it said is underappreciated by market analysts.
But taken altogether, Goldman says the impact of Harvey will be stronger on demand than it will for supply. In other words, in the first month after the storm, oil demand will fall by 600,000 bpd while supply will only be curtailed by 400,000 bpd. A net-bearish impact.
The two storms’ impacts on the oil market could be drastically different. Harvey put Houston, the U.S.’ fourth largest city under water, including some 500,000 cars. Those cars are not going to be driving again, and the people who own them, in large part, won’t be hitting the roads again in the near future. But, as mentioned, the storm also devastated the U.S. refining sector and even pummelled shale production in the Eagle Ford.
Hurricane Irma, on the other hand, if it directly hits South Florida, would destroy oil demand in the U.S. Southeast for a period of time, without any impact on supply.