Amid the regular fundamentals that traders must follow to judge the oil market, weather forecasts become important at this time of year as well. This is especially true for weather forecasts for the Gulf of Mexico.
The two most important factors driving oil prices this week are American oil production and the U.S. stock market. WTI and Brent rose on Wednesday morning as traders reacted to a forecast from API that showed an 8.1 million barrel draw from U.S. crude oil stores. Another price boost came on Wednesday when the EIA data revealed that crude oil stores actually dropped by 9.5 million barrels last week.
However, traders shouldn’t take their eyes off of the Gulf of Mexico for the rest of this week and next as a major weather system—to be named Tropical Storm Barry when it reaches sustained winds of 39 miles per hour—has the potential to impact oil production, refining, exports from the U.S., imports to the U.S. and prices.
The tropical depression forming in the Gulf of Mexico is now expected to gain enough strength to become a Tropical Storm, and perhaps a hurricane this weekend. Most likely to be impacted is the area that's home to many large U.S. oil refineries and major ports between Houston and New Orleans. In fact, this coastline houses more than 45% of the total U.S. refining capacity. The storm is also expected to cause flooding, which, as we learned from Hurricane Harvey in 2017, can disrupt refining and transportation for extended periods of time.
There is no way to predict exactly how any particular storm in the Gulf of Mexico will affect the oil industry and prices, but here are the key issues traders should watch:
Offshore oil production in the Gulf of Mexico can be shut down in preparation for a storm as companies evacuate personnel on offshore platforms. So far, Chevron, Royal Dutch Shell, BP, BHP Group and Anadarko have all started evacuating people from oil platforms in the Gulf of Mexico, and additional companies are considering evacuations as well. One-third of U.S. offshore oil production is already stalled as a result of this impending storm. About 16% of all U.S. crude oil production comes from offshore oil drilling.
Oil refineries in the affected area could experience short-term or long-term outages as a result of the storm and subsequent flooding. In 2017, flooding from Hurricane Harvey forced the largest refinery in the U.S., Saudi Aramco-owned Motiva, to shut down entirely for two weeks. Damage from the flood was not fully repaired for many months.
For this storm, some meteorologists have already predicted up to two feet of rain. Gasoline and distillate production could be hit as well as U.S. crude oil stores. If refineries are unable to process crude oil but oil production is largely unaffected, the result would be a large build in U.S. crude oil stores in the weekly data released in the weeks after the hurricane.
Port and pipeline closures due to flooding or other storm damage can also result in higher than usual builds in U.S. crude oil storage. U.S. crude oil exports are now an important part of the global oil trade. Most U.S. crude oil is exported from ports in Houston, Galveston and the Louisiana Offshore Oil Port (LOOP). Oil exports (and imports) are likely to be halted during times of bad weather and, in some cases, flooding can put a port out of commission for days or weeks after the storm has passed. With extreme flooding, we could see a temporary drop in U.S. oil exports that will show up in the weekly and monthly export data following the storm.
Traders and market watchers should keep these issues in mind throughout the U.S. hurricane season, which lasts from May to November and reaches its height between August and October. However, every hurricane is different. Path, wind strength, speed and rainfall can all impact regions differently. For example, one storm might force offshore oil drilling and ports to close for an extended period of time but refineries could be unaffected. Oil storage numbers might seem unaffected in this case, as the drop in production and the drop in exports offset each other. Whatever the case, get ready for a wild ride this hurricane season.
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