Updated: Hurricane Harvey Energy Impact - Butler Financial, LTD
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Updated: Hurricane Harvey Energy Impact

As post-Harvey energy disruptions subside, infrastructure resilience will be a key theme for reconstruction, says Pavel Molchanov, Senior Vice President and Energy Analyst.

September 6, 2017

Nearly two weeks after Hurricane Harvey made landfall in Texas, the energy sector is still feeling some impacts but is in the process of getting back to normal. Oil production, the first part of the value chain to experience outages, is also the first to resume near-normal operations. Offshore production outages, which had peaked at more than 400,000 barrels per day on the day of landfall, have already decreased to less than a quarter of that level. The average height of offshore production platforms had been raised by 20 feet since the days of Katrina in 2005, and this has proven very effective in preventing structural damage to platforms during Harvey.

Refining, on the other hand, remains the most affected part of the energy sector. Simply put, it takes a lot longer to restart a refinery as compared to oil and gas wells. The good news is that structural damage to refining facilities appears to have been generally mild. In contrast to the aftermath of Katrina, when several refineries took months to resume operations, the post-Harvey recovery should be a matter of weeks. Around 4.0 million barrels per day of refining capacity is still offline, but the bulk of it is in restart mode. Refining impact beyond September should be minimal. In the meantime, localized cases of gasoline shortages are to be expected, though a jump in imports from Europe will provide a temporary solution. There are more than 20 days of U.S. gasoline consumption in commercial inventories, and thus there is no risk of nationwide gasoline shortages. That said, it is intuitive that higher refining margins are resulting in a temporary increase in gasoline prices during September.

In addition to disrupting the energy sector, Harvey has also shown that resilience of coastal infrastructure leaves much to be desired. For example, the entire city of Beaumont, with nearly 120,000 people, still remains without safe supply of running water. Power outages during Harvey showed the vulnerability of the grid. As post-Harvey reconstruction begins, it will be worth thinking about how to rebuild infrastructure that will be more resilient ahead of future storms. In some cases, it may require raising buildings to limit the impact of flooding: for example, preparing for 500-year floods rather than 100-year floods. Hardening buildings against wind damage is also part of the solution. Federal funding, including the flood insurance program (which is due to be renewed by Congress), may eventually incorporate more stringent conditions in order to mitigate hurricane-related damage in the future. But even without that, pressure from private insurers and property owners will likely result in a heightened focus on how to create more resilient infrastructure.

Investing in the energy sector involves risks and is not suitable for all investors.

Original article: August 28, 2017

Hurricane Harvey, which made landfall in Texas late last Friday and began to dissipate over the weekend, marks the strongest hurricane to reach the U.S. mainland in 12 years. However, the extended media coverage hurricanes receive often creates the perception that their economic impact is more severe than it actually is. Case in point: the oil industry. We periodically hear questions from investors about whether Gulf of Mexico hurricanes are bullish or bearish for oil prices. The answer is: neither. With rare exceptions, these hurricanes cause only limited and brief disruptions to oil supply, which aren’t needle-moving in the context of a massive global oil market.

In the case of Harvey, Interior Department data shows that, at the peak last week, 430,000 barrels per day of offshore oil production was shut down. By way of background, the global oil market is 98 million barrels per day. Of that amount, the Gulf of Mexico produces 1.7 million barrels per day, three-quarters of which did not experience outages due to Harvey. And because hurricanes rarely cause structural damage to offshore production platforms, the Harvey-related disruptions should end very shortly, within days or a few weeks. For some perspective, the wildfires in Alberta, Canada during the summer of 2016 had shut down as much as 1.0 million barrels per day – and the impact of the wildfires lasted considerably longer.

As a rule, hurricanes potentially create more risk for refineries (due to flooding) rather than oil production. This was certainly visible in the aftermath of Katrina in 2005, when several Louisiana refineries were flooded. In contrast to offshore platforms, refinery damage due to floods tends to take longer to repair. In and of themselves, refinery outages do not result in higher prices for crude oil, because the level of oil supply and demand remains the same. However, reduced output of gasoline and diesel can have the effect of raising fuel prices at the pump. In the case of Harvey, the storm caused a large amount of rainfall over the Houston area – the largest U.S. refining hub – and at least three refineries are reported to be offline as a precaution. However, initial indications do not point to any significant refinery damage. Though it will take some time to fully inspect the facilities, the impact of Harvey on refining appears to be minimal. As the U.S. summer driving season winds down – and fuel prices tend to seasonally decrease, all else being equal – Harvey is unlikely to change that picture.

Investing in the energy sector involves risks and is not suitable for all investors. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability.

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