What Hurricane Harvey Could Mean For Energy Markets
Author: Portfolio Specialist Group
August 28, 2017
Hurricane Harvey made landfall near Corpus Christi, Texas on Friday with Category 4 strength, combining as much as 50 inches of rainfall with 130 mph winds. With widespread flooding and significant wind damage in a major metropolitan area such as Houston, obviously the primary concern is the brewing humanitarian crisis. On a secondary note and with respect to financial markets, the energy sector is also being heavily impacted.
As of Sunday, refinery outages totaled approximately 3 million barrels per day, equating to 16.5% of total U.S. activity. Luckily, most of these outages are preventative closures in anticipation of the storm, with only a few locations reporting minor flooding at this point. However, if Harvey, now downgraded to a tropical storm, continues its path through Houston, further outages may be on the way for the 850,000 barrels per day of capacity currently online in the nation’s fourth largest city.
Refineries at Risk of Outages
Source: Goldman Sachs, August 28, 2017
The impact on production has been much less at this point, with only around 11% of total U.S. production offline, and only 3% of current gas production.
Gas prices have been quick to react, however, spiking 5% on average since Tuesday (August 22). Morgan Stanley predicts current conditions will be supportive of gas prices in the near-term, as reduced supply should drive prices higher. The medium-term impact becomes more uncertain and depends on the balance between U.S. refinery and upstream outages. Threats of heavy rain still expected and subsequent flooding and power outages could slow recovery efforts.
Regional Gas Prices Have Risen Sharply Since August 22
Source: Bloomberg, Morgan Stanley Research, August 28, 2017
Onshore U.S. production has typically normalized within a month, based on the most recent hurricanes as a proxy, while the impact on demand usually lasts several months. However, with Hurricane Harvey being the most powerful storm to hit U.S. shores in a decade, it is difficult to forecast the true impact that lies ahead at this point.