Hurricane Harvey was finally downgraded to a tropical storm on Friday, but not before it devastated Texas, killing more than 40 people and causing severe flooding in the state. The oil industry of the region took a massive hit too, with at least 4.4 million barrels per day of refining capacity being shut down. 25% of the oil refining industry in the US was impacted by the storm.
As a result of this natural disaster, oil prices fell further on Friday. The shut down in refining capacity caused a reduction in the demand for crude oil, thereby widening an already wide crack spread to $27.79 a barrel. The crack spread shot up by $10 in less than a week. The Brent Crude contract for October closed on Thursday, with a slight gain of $1.52, at $52.38. The Brent Crude contract for November is currently running at $52.36 a barrel (down 50 cents).
The US Crude contract was down by 50 cents at $52.36 per barrel. While the contract’s price went up by 2.8% on Thursday, it was already on a downslide by 2%. Crude oil on the New York Mercantile Exchange also closed this week lower by $0.48 at $45.96.
On its last day of trading, the September futures gasoline contract went up by 25.52 cents, or 13%, to close trading at $2.1399 per gallon on Thursday. Thanks to the impact on the market, the October futures contract opened much lower at $1.7744 per gallon. US Gasoline prices were up on a two year high at $2 per gallon on Thursday. Luckily, the prices went down slightly to $1.8847 on Friday.
For the first time in 5 years, the US government opened up its oil reserve on Thursday, releasing 1 million barrels of crude oil for an oil refinery in Louisiana. The government also said that they would be comfortable releasing more reserves should the need arise.
While the international market remained steady with an ample supply of crude oil, analysts predict that the long term impact of Harvey is going to be that there will be an oversupply problem in the international market. This is because crude oil production will be back on track faster than oil refining operations, thus creating another imbalance in the industry.
Experts predict that it will be days, maybe weeks, before the oil industry stabilizes in the Texas area. The area of Texas around Corpus Christi (where the hurricane made landfall) right up to the Louisiana state line accounts for 3% of the US economy. This area is also the oil and chemicals export market for the country. This disaster impacts the US’s exports to Mexico and other Latin American countries. Since the shale oil “revolution”, the US’s oil production went up sharply and it became a serious exporter of oil. In the wake of Harvey, exports have been impacted, meaning these countries will have to look for oil elsewhere. This will drive oil prices up.
Gasoline prices are expected to go up to $2.55 a gallon in the coming days, with the highest prices around the Texas Gulf area.
The challenge for the Texas Gulf oil region will be that even if the refineries are back on track with production, the pipelines also need to be operational. Two major pipelines, one that supplies gasoline to the East Coast and another that carries crude oil from the Permian Basin oil fields in Texas to the Houston refineries, have shut down due to minor damage.
The shipping ports, also currently closed, will need to open up for the industry to get back on its feet.