The Gulf Coast is now a force on global oil and gas markets, making the hurricanes that regularly ravage the region a greater threat to supply
The flooding has finally receded. The cleanup has begun. Houston, America's oil capital, and much of Texas will be counting the cost of
Hurricane Harvey in the months and years to come.
Energy markets too are taking stock of the damage. Harvey took aim at the heart of the American energy complex, which has undergone a building boom since the last major storm hit the region a decade ago. Billions of dollars have been spent on new pipelines, pumping stations, refining facilities, ports, liquefied natural gas export plants and oilfields to link surging output with markets at home and abroad. It has turned the Gulf Coast into a vital hub of production and refining for the global oil and gas trade. But Harvey also exposed the vulnerabilities of building such an important hive of activity in the heart of Hurricane Alley.
Start with the refineries, which were particularly hard hit. In total, around 4.5m barrels a day in fuel-making capacity was shut down by the storm, a quarter of total US capacity, with many facilities left underwater for days. Nearly a week after the hurricane swept through, stunning images showed the Motiva plant, America's largest refinery, swimming in a soup of oil-sheened flood waters. None of the damage appeared too dire, though a return to full operations will take weeks.
Production was hit too. At its peak, Harvey knocked around 450,000 b/d, 5% of US output, offline in the Gulf of Mexico as operators evacuated their offshore installations. This was a familiar drill for offshore operators and markets. New this time around was the emergence of the Eagle Ford shale play, which found itself in Harvey's destructive path. As much as 0.5m b/d of the field's 1.3m b/d of output was knocked out, another roughly 5% of US production, though estimates are sketchy. Federal regulators have a reliable system in place to give markets a clear and timely view on how storms are affecting Gulf output, but no such system was in place for the Eagle Ford. It was a glaring blind spot for the market.
The ripple effects will be felt across global markets to a far greater degree than previous storms
The tangle of pipelines that feed crude from around the country into the Gulf refineries were also hard hit. At the peak, close to 1.8m b/d of pipeline capacity was likely shut down, according to estimates from analysts at
Bank of America Merrill Lynch, backing up output at faraway oil and gasfields that weren't directly hit by the hurricane. Many of the ports that handle oil tankers and LNG vessels bringing product to the US and, increasingly, taking American-produced oil, fuel and gas abroad were also shut down.
Traders couldn't rely on their familiar blueprint for responding to Gulf Coast storms. Typically, oil prices would have surged in response to lost Gulf of Mexico (GOM) output and worries over tight supplies. That didn't happen this time. Instead, WTI slipped on the shock to demand that came from the temporary loss of 25% of the nation's refining capacity. At the same time, WTI's discount to Brent widened to $6 a barrel, twice what it was before the storm, and the highest since mid-2015 as US crude backed up with fewer refining and export options. Gasoline and other products, meanwhile, surged more than 10% as output collapsed.
The ripple effects from Harvey will be felt across global markets to a far greater degree than previous storms. In 2006, the US exported around 0.9m b/d in oil and fuel from the Gulf Coast. Today it is the largest refined product exporter in the world with 4.75m b/d of crude and products leaving its shores. Mexico and other Latin American countries in particular have become reliant on a steady stream of US fuel. They will turn to Europe, and to a lesser extent Asia, to fill the gap, bidding up product prices until the US recovers.
One country particularly vulnerable to Harvey's fallout is
Venezuela. Even as relations have worsened between Caracas and Washington DC, the nation's oil industries have grown more closely intertwined. Venezuela relies on the US as its main cash-generating export market. At the same time, it has also come to rely on imports of US light tight oil as diluent to support its own heavy-oil production. The short-term hit to US demand for Venezuelan crude couldn't come at a worse time. Venezuela's cash-strapped state oil company PdV faces billions of dollars in debt payments in October and November. In previous storms, it has taken several months for shipments to return to pre-storm levels. Harvey may be imposing the oil embargo on Venezuela that the Trump administration has been threatening.
On the gas side, prices remained remarkably steady, largely because the US gas production hub has moved from the Gulf Coast north to the Marcellus shale-gas play. However, the Gulf Coast is undergoing an LNG export building boom. The next time a hurricane hits the Gulf Coast more than 10% of global LNG export capacity could be in its path.
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