Tropical Storm Harvey continues to cause severe flooding in the Houston area. And it’s showing no signs of easing up.
The slow-moving, record-shattering storm battered the region for a seventh straight day yesterday, and began to move into southwest Louisiana.
Hundreds of thousands of people are under evacuation orders. Shelters are filling to breaking point.
It’s a tragic situation.
My colleague Bernd Struben has relatives in the Houston area and they are telling him the water’s still rising at a frightening pace. Thankfully Bernd’s relatives are all safe, and are busy helping out their community.
Aside from the human cost, there’s set to be record financial costs as well.
Early estimates suggest the financial damage is big. And one forecaster has predicted the final bill could be huge.
David Havens, an insurance analyst at Imperial Capital interviewed by Bloomberg, estimates that the cost could rise as high as US$100 billion.
The effects on the US oil industry are likely to be big as well.
Houston is the central hub for the US energy industry. It’s important for oil production and storage. Much of the US Strategic Petroleum Reserve is close by.
There is some onshore oil production in the general area, and quite a bit of offshore production.
Perhaps most importantly, the five largest oil refineries in the US are on the Texas and Louisiana Gulf Coast. The two largest refineries in the whole country are in the vicinity of Houston.
The refineries are the first buyers of oil to create products like fuel.
So how will the hurricane impact the local oil industry?
Up to 15% of total US energy production cut
According to S&P Global Platt’s Energy, the following refineries have shut down as a result of the storm:
Source: S & P Global Platt’s Energy
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** Not confirmed
This represents around 15% of total US energy production.
The total extent of the flooding and its effects on the oil facilities is still largely unknown. But previous hurricanes in 2005 and 2008 reduced refinery production rates by as much as 20%. And these hurricanes were less widespread than the current one.
Even refineries that are able to run may have trouble getting enough oil supplies through.
Ships carrying oil cargoes are unable to enter Texas ports. Some pipelines that carry crude supplies to refineries have shut down.
Funnily enough, the oil has price has reacted by moving lower, not higher as you might expect.
This is because the refineries are bearing the brunt of the storm. They have stopped buying oil, reducing short term demand. Previous hurricanes like Katrina hit the offshore production platforms more, effecting supply of oil rather than the first buyers of the oil.
But that’s no comfort to fuel buyers who rely on the refineries to create supply. The dynamics are the opposite here. Supply is down and demand is up.
Gasoline futures have been on the rise for six straight sessions as fuel makers on the Gulf Coast have had to slow down or stop entirely. This has prompted concerns about fuel shortages.
The longer term price effects will depend on the extent of the total damage.
On Wednesday, investors will shift some of their focus to weekly oil inventory data from the US government.
Analysts expect to see a continued decline in crude oil stockpiles.
The American Petroleum Institute said late Tuesday that its own data for the week showed a 5.8-million-barrel decrease in crude supplies. They also predicted a 476,000-barrel rise in gasoline stocks and a 486,000-barrel decrease in other oil inventories.
The road ahead for oil
So far, most energy industry commentators think that the storm’s effects on the oil price will be temporary.
A ‘blip’ rather than a shift in the market.
What is the future for oil prices, then?
Although most analysts think the long term range for oil will be between US$40 and US$60, my colleague Greg Canavan has a different view.
He has just completed some research on why he thinks oil prices could be set to rise a lot higher over the next 12 months than people expect.
And he has three stocks he think will rise by up to 10 times their current value if he’s right.
It’s definitely worth a read if you like good contrarian investments.
Editor, Money Morning