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Trading Lessons

Hurricane Harvey’s Short-Term Impact May Be Higher Oil Prices

Commodities / Crude Oil Sep 07, 2017 - 08:08 PM GMT

By: John_Mauldin

Commodities

Harvey hit hard the heart of the US oil industry.

So far, it has shut down 11.2 percent of US refining capacity (about one-third of all US refining capacity is in Texas’ Gulf Coast) and roughly 25 percent of US oil production from the Gulf of Mexico (accounting for about 20 percent of US crude production). It has also closed all ports along the Texas coast.


Based on current refinery operations, anywhere from 1 million to 2.2 million barrels per day (bpd) of refining capacity are offline, as well as just under half a million bpd of production. The US has been producing around 9.5 million barrels per day. This production has played a major role in keeping global oil prices low.

This in turn hurt oil-dependent countries like Russia and Saudi Arabia.

Harvey’s Impact on US Oil Production Will Be Temporary, Even If It Is Severe.

In the short term, Harvey’s impact could be globally significant. Harvey has passed, but new storms in the Gulf of Mexico and Atlantic Ocean are threatening to dump more rain on the Gulf Coast.

If there is damage to the Colonial Pipeline—which transports more than 40 percent of the Texas Gulf Coast’s refined product, according to the EIA—US consumers would not only have to pay more at the pump, but US policymakers would have to deal with Russia, which would greatly benefit from even a momentary spike in prices.

It won’t be clear what will happen to oil prices until we know what kind of damage coastal facilities have sustained, but the possibility of higher prices can’t be ruled out.

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