We are now entering the most active months of the hurricane season in the Atlantic Ocean. Even though weather scientists are forecasting that the 2018 hurricane season will not be nearly as active as 2017 and 2016, conditions are most favorable for hurricane development now through October.
Here are several ways we can expect hurricanes to impact oil production, oil prices and gasoline prices over the next couple of months.
1. Oil production in the Gulf of Mexico
Not all hurricanes enter the Gulf of Mexico, but when they do, many oil companies will take precautions and shut down their offshore production and evacuate personnel before the hurricane hits. Oil market watchers should be aware that a hurricane or tropical storm can impact offshore production even if it does not reach land or garner much media attention.
Hurricane Gordon, which came through the Gulf of Mexico on Tuesday and Wednesday, forced producers to shut down 9.23% of oil production in the Gulf and 9.06% of natural gas production from the northern Gulf of Mexico. However, this is only 156,907 barrels per day and pushed WTI up only about 9 cents on Tuesday. On the other hand, Hurricane Nate shut down about 92% of all oil production and 78% of all natural gas production in the Gulf of Mexico as it barreled through in early October 2017. Those closures last year pushed the price of WTI up about 35 cents.
2. Oil refineries along the Gulf of Mexico
Over 45% of the total U.S. refining capacity is located in the Gulf. Hurricanes and other storms can cause flooding, sometimes severe, that has caused refineries to shut down. In 2017, the largest refinery in the United States, Saudi Aramco-owned Motiva, shut down for 2 weeks after Hurricane Harvey caused severe flooding in Port Arthur, Texas. Other refineries only closed for a few days during and after Hurricane Harvey. All told, over 5% of U.S. refining capacity was impacted by that hurricane. Even before Harvey made landfall in late August 2017, the RBOB October gasoline contract rose by 10 cents/gallon based on anticipation.
3. Gasoline shortages
Hurricane preparation can also lead to temporary shortages in gasoline in certain regions of the United States, which in turn tends to cause temporary price spikes. During preparations for Hurricane Irma in 2017, the governor of Florida urged residents to fill up their cars with gasoline a week in advance of the hurricane. This caused gasoline shortages across the state days before the storm arrived. Most of Florida’s gasoline is brought from refineries in Texas and Louisiana via barge across the Gulf of Mexico and then sent east across the state in a single pipeline. Florida, the country’s fourth largest state, is particularly susceptible to gasoline shortages.
When superstorm Sandy hit New Jersey and New York in 2012, gasoline shortages were evident across the region and prices at the pump for consumers jumped before state governments implemented rationing plans. However, the storm actually pushed RBOB gasoline futures prices down rather than up because of travel bans, school and business closures and an overall reduction in road traffic while debris was being cleared.
4. Port and pipeline closures
Ports along the eastern seaboard and in the Gulf of Mexico will often close if they are expected to be in the path of a hurricane. Flooding can also mean delays in reopening ports after a hurricane has passed. This is particularly important to oil and gasoline prices when ports in the Gulf of Mexico are impacted. Ports all along the Gulf of Mexico handle the vast majority of crude oil imports and exports in the United States. A delay in crude oil exports due to port closures from a hurricane can cause backups in oil transportation infrastructure in Texas and Oklahoma that can have significant reverberations in the oil market. Export delays can cause an unanticipated build up in oil stocks at the Cushing storage facilities that EIA projections do not anticipate. If pipelines are shut down due to weather issues, then companies producing in other areas may have to halt drilling.
5. Non-traditional hurricane paths
It is also possible that hurricanes can take non-traditional paths, such as north towards England or south towards Caribbean Islands near Venezuela. Last yeah, a tropical storm named Ophelia hit Ireland. In that event, offshore oil production in the North Sea could be suspended. In 2007, Curacao, which has a major refinery for Venezuelan oil, was hit by hurricane Felix but the refinery was not damaged.
Unless a hurricane is unusually destructive or flooding is particularly acute, most of these issues can be resolved within a week of an event. Some issues, like gasoline shortages or excess oil in storage areas can linger.
The key point for market watchers and traders to realize is that with hurricanes, there is no uniform consequence. The price of WTI may rise if rigs are shut down or it may fall if the EIA reports an unanticipated build in crude oil storage. (Of course, Brent prices are generally undisturbed by hurricanes in the Gulf of Mexico or the U.S. coast).
As well, gasoline prices may jump for consumers but futures contracts may fall, depending on which areas are most sharply impacted by the hurricane. Each hurricane effects the markets a little differently, so it's essential to keep abreast of the details.