Will hurricanes succeed where OPEC has not?
Two weeks ago, Hurricane Harvey defied the oil market’s expectations, sending crude prices lower instead of higher as major storms in the Gulf Coast typically do.
Now, the price of oil has climbed back near $50 a barrel even though U.S. oil stockpiles have increased dramatically in Harvey’s aftermath. The reason: The nation’s stocks of gasoline have shrunk even faster after Harvey crippled more than a dozen major Gulf Coast refineries, and Hurricane Irma choked off supplies to Florida.
That means refineries will need a lot more crude to meet the demand.
“Because of the two storms, the market really is tighter than people expected,” said Ed Morse, global head of commodities research for Citigroup. “Undoubtedly, the market is telling us something dramatic happened. But we have a crude oil market that’s simply not weak, even with this inventory build.”
As Texas refineries come back online, and refining has become more profitable with higher gasoline prices, demand for oil has risen, as traders respond to a U.S. fuel shortage that is even affecting markets overseas, Morse said.
“The U.S. is an international hub,” Morse said. “It’s no longer a sinkhole for products coming from outside. This is a sign of things to come should we have more than one hurricane.”
U.S. oil prices were flat Friday at $49.89 a barrel, a day after rising 59 cents on the New York Mercantile Exchange.
The combination of Hurricane Harvey and Hurricane Irma disrupted the shipping of Gulf Coast gasoline supplies to Florida, as motorists guzzled gasoline to flee the Sept. 10 storm. On Friday, the Energy Information Administration noted Florida doesn’t have refineries or major pipelines from the Gulf Coast and depends “almost entirely on marine movements of petroleum products.”
“Any threat of actual disruption to supply sources and shipping routes, such as Hurricane Harvey, can affect gasoline markets,” the EIA said. Gasoline prices rose 40 cents per gallon for regular across Florida.
In coming months, the storms could bring petroleum stockpiles in much of the world closer to normal levels after the Gulf Coast’s shutdown, the International Energy Agency said last week. The agency argued that the effects of shutting down the Texas refining industry for several weeks could soon all but evaporate the world’s glut of gasoline and other fuels.
The Paris-based agency noted that fuel inventories in developed nations are only 35 million barrels above the five-year average and said it believed the current constraints on fuel supplies in the United States could bring that figure below that level soon.
“We think it is possible that will happen before the end of the year, given the scale of the disruptions to energy infrastructure caused by the hurricane,” the IEA said.
The group said the episode shows how important the Gulf Coast energy hub has become to global markets — a “global trading center” that exports 4 million barrels of petroleum products a day to places like Mexico and Venezuela. And it’s where companies ship out 800,000 barrels of crude a day to places like China, South Korea, Italy, the Netherlands and Singapore.
“The rise of the Gulf Coast as a major energy hub means that, in some respects, it can be compared to the Strait of Hormuz in that normal operations are too important to fail,” it said.