Hurricane Harvey heading to Texas, how will it impact oil?

UPDATE: 8/27/17: 7:365p EST hurricane Harvey has hit Houston as a Category 4 storm and the scenes look apocalyptic. The Mayor had decided not to evacuate  the city amid fears millions would get tuck and swept away while on the  road, but 50 inches of rain have hit the city and many are stuck indoors as the rains reach levels which threatens their lives.

A picture is worth a thousand words , below are some shocking and inspirational ones.

Hurricane Harvey, the most severe storm to hit the Gulf Coast for nearly a decade, is expected to make landfall tonight near Corpus Christi in Texas. The hurricane is projected to register as a Category 2 or 3 hurricane, making it the strongest storm to hit Texas-Louisiana since 2008 (Category 2: Ike, Gustav) or 2005 (Category 3: Rita, Katrina).

According to weather forecasts, a combination of very low wind shear and warm sea surface temperatures will create additional upside risk to the storm’s intensity.

Hurricane Harvey Heading To Texas

Hurricane Harvey is threatening a large percentage of the Gulf Coast oil and gas infrastructure. Some oil majors have already shut off production offshore to limit any possible damage.

According to Bank of America, currently, about 9.6% of Gulf of Mexico production is currently shut-in, around 167,000/bbl. These facilities seem to have escaped without any major incidents so far, but we will not know for sure until once the storm has passed and facilities are inspected before being brought online.

Hurricane Harvey Heading
Hurricane Harvey heading to Texas

The most significant impact is likely to be on refining with 1.2 mmb/d of US refinery capacity immediately threatened according to analysis from Goldman Sachs, which represents roughly 6.6% of US available capacity. If the hurricane turns east towards Houston after making landfall, another 2.5 mmb/d of refining production will come under threat. Bank of America’s analysts estimate that’s 900 kb/d of distillate is currently in the hurricane’s path with another 4.6 mmb/d lying in the ‘risk cone,’ which could suffer excessive flooding.

Michael W. Bradley, Managing Director and energy strategist of Tudor Pickering Holt, notes that as the Gulf Coast is home to around 45% of US refining capacity, the storm will push crack spreads higher (margins have picked up 10%-20% over the past three days on the risk of disruption) until it becomes abundantly clear the extent of the refining flood damage and expected downtime.

Historical precedents give some guide as to what the industry is facing. Energy analysts at Baird note that the last hurricane of similar size, (Hurricane Rita, a Category 3 storm which made landfall on September 24, 2005) forced total US refinery utilization to drop 16.9% to 69.8% in the following week. Refineries needed another six weeks to bring throughput back to pre-storm levels. WTI crude declined 11.2% while capacity was off-line.

Macquire’s analysts have predicted the following:

“Using hurricanes Ike (2008) and Allison (2001) as comps for Harvey (similar path and sizes), refineries could be shut down from a range of a few days to two weeks. Refineries in Corpus Christi (790 kb/d) will be the most exposed before the storm moves towards Houston (1.6 mmb/d). The path could also turn towards Port Arthur, Beaumont and Baytown (North of Houston total 2.1 mmb/d), but forecasts deem this less likely. Altogether we would estimate ~1-4 mmb/d of refinery runs could be shut in. Hurricane Ike shut in nearly 4 mmb/d of refining capacity in Houston, Galveston, Port Arthur, and Corpus Christi. The storm shut-ins were mainly based on closures during the storm, but most refineries did take on average 10 days to start back up production and 14 days to resume to pre-storm levels. On the worst day (Sept 14th), 15 refineries were shut totaling 3.9 mmb/d of refinery runs, 22% of US capacity at the time.”

US crude and refined product exports will also suffer as exports from the Gulf Coast have risen sharply over the past few years and many of the major ports are on or near the path of Hurricane Harvey.

Goldman Sachs notes the ports of Corpus Christi and Freeport are likely to be most impacted initially. Recent flows from these assets average net crude imports of 100 kb/d and product net exports of 150 kb/d. The ports of Houston, Gavelston, and Texas City should be lesser although both ports have suspended loadings already. Year-to-date net imports from these two ports are 800 kb/d, and net exports are 400 kb/d.

Hurricane Harvey Heading
Hurricane Harvey heading to Texas

Authorities are more concerned about the potential for the storm to move towards Houston, where the possible flooding risk could impact a greater proportion of regional refineries. Rainfall estimates are currently estimated at 15”-20” in around Corpus while some areas directly in the path of the storm such as Colorado County is projected to get 50+ inches of rain, with surrounding counties taking on over 30+ inches.

Flooding caused the greatest problems with hurricanes Katrina and Ike, and significant change of direction towards Houston could have a disproportionately much worse impact giving the steep change in exposed infrastructure.

Onshore drilling activities are not expected to escape unscathed, although the impact will be insignificant compared to the scale of disruption refineries face. Drilling operations by some operators in the Eagle Ford have already been suspended with EOG, Statoil, and ConocoPhillips confirming a pause in operations. Bank of America’s analysts note drilling masts cannot be operated in high winds, above 45 mph, and these areas are also liable to flooding. EOG has the largest potential exposure with an estimated 11 rigs inside the hurricane’s cone. Chesapeake is the second most exposed with an estimated seven rigs at risk.

Refineries operating outside of the hurricane’s cone are likely to see a near-term boost in margins as supply for the rest of the country is limited thanks to the Gulf Cost shut-in. Gasoline margins have already jumped by 10% to 20% over the past two days, and distillate margins are up by 8%. Gasoline stocks remain elevated versus the prior end of season levels, which has cushioned some of the price impact, but any sustained disruption on the largest refining center in the US will quickly correct this balance.Hurricane Harvey Heading

Hurricane Harvey heading for huge losses?

Hydrocarbon assets may suffer downtime as a result of damage from Hurricane Harvey heading to Texas, but the bulk of the financial liability will be borne by insurers, which are bracing for the worst. After a decade of favorable weather, Harvey’s ferocity threatens to force losses of as much as $20 billion onto the insurance industry according to analysis from Swiss bank UBS. In a report published today, the bank’s insurance analysts noted:

“Plotting the hurricane’s expected path, we find similarities with Hurricane Ike which struck Texas as a Cat 3 hurricane in 2008, causing >$20bn of insured losses. We run illustrative sensitivities to potential insured industry losses of $5bn, $10bn and $20bn, based on market share losses from Hurricane Ike. We find that a $20bn industry loss would be contained to cat budgets at the four major reinsurers.”

Unfortunately, this could turn out to be a conservative estimate. Hurricane Katrina in 2005, another Category 3 storm, cost the insurance industry $76 billion.

With Hurricane Harvey Heading to the area, only time will tell

Hurricane Harvey Heading