Impact of Hurricanes on Oil Prices and Market Volatility

As we endure what meteorologists have predicted to be an unusually intense Atlantic hurricane season, with forecasts estimating 20 to 25 named storms (storms that reach a certain level of intensity and are given a name for tracking purposes) and a possibility of up to 30, the U.S. oil and natural gas industry braces for potential disruptions. 

The heightened risk for weather-related production outages poses concern for energy markets, especially given the strategic importance of coastal regions to U.S. petroleum infrastructure and the Strategic Petroleum Reserve remaining depleted. Here, we’ll look at how hurricanes affect oil prices and markets as a whole.

Understanding Hurricane Season and Its Timing

The Atlantic hurricane season, defined by the National Oceanic and Atmospheric Administration (NOAA), spans from June 1 to November 30. Typically, the season begins with forming early named storms in June, while more severe hurricanes tend to develop in August and early September. Hurricanes most commonly impact the Southeastern U.S. and the Gulf Coast, critical areas for the U.S. oil and natural gas sectors.

Impact of Hurricanes on Petroleum Markets

Hurricanes profoundly affect petroleum markets, primarily through disruptions in crude oil production and refinery operations. The Federal Offshore Gulf of Mexico (GOM) is a major U.S. crude oil production hub, contributing approximately 14% of the national output in 2023. During hurricanes, offshore oil platforms often experience significant operational interruptions, including evacuations and temporary shutdowns to safeguard personnel and infrastructure.

Refinery operations are equally vulnerable. The Gulf Coast houses nearly half of the U.S. refining capacity, with significant facilities in Texas and Louisiana. These refineries are prone to flooding and power outages during major storms. The region’s refineries, such as Motiva’s Port Arthur and ExxonMobil’s Beaumont, represent critical parts in the U.S. refining machine. Disruptions here can substantially reduce American refining capacity, affecting gasoline and diesel supplies nationwide.

Effects on Natural Gas Markets

Natural gas markets also face risks from hurricanes, though the impact has diminished in recent years. The Gulf of Mexico was once a significant source of U.S. natural gas, but its contribution has decreased significantly, from 17% of total U.S. production in 2005 to less than 2% in 2023 as production in other areas of the country has ramped up. Consequently, while hurricanes can still cause temporary reductions in natural gas output, their overall impact on the national supply is limited.

Hurricanes can, however, disrupt liquefied natural gas (LNG) export volume. The Gulf Coast’s LNG export facilities, which have a combined capacity of nearly 13 billion cubic feet per day, are quite susceptible to weather-related interruptions. For instance, Hurricane Laura in 2020 temporarily halted LNG exports from the critical Sabine Pass and Cameron facilities in Louisiana. These disruptions introduce additional volatility to global LNG markets and can negatively affect U.S. export revenues.

Determining the Scale of Impact

The severity of a hurricane’s impact on petroleum markets largely depends on its location and intensity. A storm hitting a region that doesn’t have much in the way of production or refining infrastructure is obviously less likely to disrupt overall U.S. supplies. However, even without direct impacts to facilities, hurricanes can still disrupt the supply chain and cause localized supply shortages, as seen in areas like Florida, which largely relies on barge shipments from Gulf Coast refineries.

Refinery Capacity and Risk Management

The refining capacity at risk from hurricanes is substantial. The Texas Gulf Coast alone boasts 5.5 million barrels per day (b/d) of refining capacity, with significant facilities, like Motiva’s Port Arthur refinery and Marathon’s Galveston Bay refinery. The Louisiana Gulf Coast contributes an additional 3.3 million b/d, with key refineries like Marathon’s Garyville facility and ExxonMobil’s Baton Rouge refinery.

These regions collectively account for nearly 48% of U.S. refining capacity. While a hurricane may impact only one cluster of refineries, the potential for significant production capacity to be temporarily offline is high, mainly if major storms cause extensive damage. For instance, the Phillips 66 Alliance refinery in Belle Chasse, Louisiana, was permanently closed following the extensive storm damage it sustained in 2021.

Historical Impact and Price Response

Historically, hurricanes like Ike in 2008 and Harvey in 2017 have caused temporary spikes in oil and gasoline prices, with substantial price increases observed. However, these effects are usually short-lived, and prices typically return to pre-storm levels relatively quickly as the industry recovers and supply disruptions are resolved.

The anticipation of hurricane impacts often leads to price volatility, but the overall effect on global oil prices may be more tolerable. The market’s ability to recover and the relatively high level of global oil supply generally mitigate the long-term impact of these disruptions.

Of course, as the 2024 hurricane season unfolds, the U.S. oil and natural gas industry faces considerable risks from the larger end-of-season storms. While the historical impact on oil and natural gas markets has been significant, the industry’s resilience and the global supply network’s robustness generally help mitigate against any prolonged disruptions and price volatility.

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