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The Aftermath of Hurricane Harvey - September 2017

Source: OPEC_RP170902 9/12/2017, Location: Europe

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The impact of Hurricane Harvey has been particularly damaging to the energy centres of Texas and Louisiana, bringing to mind the destructive impacts of past storms, in particularly Hurricane Katrina in 2005. It also highlights some important shifts that have occurred in the US energy sector since then.

In 2005, Hurricane Katrina temporarily shut in 1.4 mb/d of US Gulf production, representing 95% of output in the area. Production was slow to return as the hurricane went directly through the offshore production area, causing considerable damage to rigs and platforms. Onshore, the flooding and high winds heavily impacted the refining sector, disrupting some 1.3 mb/d of refinery capacity concentrated along with US Gulf Coast, and inflicting major damage to four refineries.

Hurricane Harvey, in contrast, has had less of an impact on US crude production, temporarily disrupting around 0.8 mb/d at its peak. Roughly half of this figure was from offshore production – which was spared the worst of the storm – while the other 0.4 mb/d was from onshore production in the shale producing region of Eagle Ford. While offshore production has been quick to return, there is still some uncertainty regarding the status of the affected Eagle Ford output due to the accompanying severe rains and flooding.

Refineries and energy infrastructure – pipelines, port facilities, terminals – saw more of an impact, due mostly to the tremendous rains that stretched from Houston into Louisiana, although facilities around Corpus Christi also experienced high winds. At its peak, around 4.8 mb/d of refining capacity was offline. The Colonial Pipeline, which ships up to 2.5 mb/d of petroleum products from Houston to the US Northeast, was also shut down. Concerns about shortfalls led to a spike in gasoline prices, which jumped by 29% from the previous week to $2.14/gal, the highest level since mid-2015 (Graph 1). The restart of refineries and pipelines, together with the existing high stock levels (Graph 2) allowed gasoline futures prices to quickly return to previous levels, while the shortfall of US products exports to nearby destinations has been accommodated by cargoes from other regions. Hurricane Harvey had a bearish impact on NYMEX WTI values, which slipped 5% from the previous week to $45.96/b. This was due to the fact that offshore facilities were not expected to see lasting damage. Additionally, the development of the US shale industry has made US supply less vulnerable to storms. Although US Gulf output has increased since Katrina, its share in US crude production has declined from 25% in 2005 to 18% in 2016, largely due to the emergence of the US shale industry. Also weighing on prices was reduced demand from US refineries at a time when US crude stocks were at comfortable levels of 80.4 mb above the five-year average. Following Harvey, the US Department of Energy has made some 5.3 mb of crude available for sale from its Strategic Petroleum Reserve (SPR). Last week’s inventory report showed a draw of only 0.3 mb in SPR for the week ending 1 September. This compares to a 20.8 mb release of SPR in the aftermath of Hurricane Katrina, as part of a coordinated 60 mb offer by IEA Members. OPEC had also expressed its commitment to fill any supply shortfall resulting from the effects of Hurricane Katrina.

In terms of the impact on US economic growth, the effects of Hurricane Harvey should be relatively minor, as disruptions are expected to be largely offset by the increase in activities related to the rebuilding efforts including $15.25 billion in aid approved by Congress. A similar impact was seen with Hurricane Katrina, where subsequent rebuilding efforts helped to stimulate the economy. Similarly, the impact on US oil demand is expected to be negligible, with offsetting revisions seen for 4Q17.

Despite the considerable damage, the US energy industry appears to be rebounding quickly. At the same time, the emergence of Hurricane Irma and other storms raises the possibility of the 2017 hurricane season being particularly destructive, with potential implications for the oil market. In response, OPEC reiterates its commitment to working together with other stakeholders for the stability and security of the oil market, which is essential for sustained economic growth and the advancement of global prosperity.

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