Hurricane Irma Could Destroy Oil Demand

About half of the shuttered refining capacity along the Gulf Coast could be back up and running by Thursday, assuaging concerns about the possibility of acute gasoline shortages in much of the U.S.

The disruptions of more than 4 million barrels per day of refining capacity have been cut in half, 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 mb/d 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 -600,000 bpd.

However, the effects could actually become slightly bullish over time as the recovery efforts pick up, and intriguingly, there is “potential for some sustained US onshore production curtailments.” Eagle Ford shale drillers were forced to shut in some shale output as both the takeaway capacity (i.e., pipelines) and Gulf Coast refineries went offline, backing up crude at the wellhead. Some estimates put Eagle Ford output down by half at first, although data is hard to come by at this point. Goldman Sachs estimates that 200,000 bpd of Eagle Ford production “remains shut-in,” which offsets some of the bearish impact on WTI from the refinery outages. Adding in some lingering outages offshore in the Gulf of Mexico, total upstream supply outages still stand at about 300,000 bpd.

Goldman raises the possibility that the comeback in shale production could be curtailed by the sustained outages at Gulf Coast refineries, a scenario that it says 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.

Things could get a lot more complicated in the days ahead with a potentially catastrophic Category 5 hurricane barreling 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. At the time of this writing, the path is still uncertain, but a multitude of scenarios have the hurricane slamming directly into South Florida by the weekend.

If that were to occur, 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.

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 before, the storm also devastated the U.S. refining sector and even pummeled shale production in the Eagle Ford.

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.

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