Will Hurricane Nate Be A Boon For Oil Prices?

by Trefis Team
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After Hurricanes Harvey and Irma caused widespread catastrophic damage in the Texas and Florida regions, Hurricane Nate made its first landfall on the US Gulf Coast as a Category 1 storm over the weekend. While the local authorities had ordered evacuations in several areas in Louisiana, the southeastern state in the Gulf of Mexico (GOM), the storm has managed to claim several lives, knocked out power in many areas, and caused heavy flooding and gusty winds along the Mississippi River. However, post its second landfall on Sunday, the storm is believed to have become less fierce as it moved further inland. In this note, we briefly discuss the impact of the Hurricane on the operations of energy companies and, in turn, on commodity prices.

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Impact On Energy Companies

In anticipation of Hurricane Nate, independent oil and gas producers, such as Anadarko Petroleum (NYSE:APC) and ConocoPhillips (NYSE:COP), had proactively shut operations from areas that were likely to be affected by the storm. These companies took pre-emptive measures since they had been forced to curtail their operations in the Eagle Ford basin last month due to the destruction caused by Hurricane Harvey. Similarly, large integrated energy companies, such as Chevron (NYSE:CVX), Exxon Mobil (NYSE:XOM), Royal Dutch Shell (NYSE:RDS.A), and BP Plc. (NYSE:BP), who have offshore operations in the Gulf of Mexico, had either ceased their operations or withdrawn their personnel from the platforms in the Gulf area. According to Reuters, so far more than 300 offshore platforms have been evacuated in the US Gulf region due to the potential damage from the hurricane. For the same reason, the US rig count for the month of September was 7 rigs lower than the previous month, marking its second decline after 14 consecutive months of increase.

Source: US Energy Information Administration (EIA)

Unlike Hurricane Harvey, that mostly impacted the oil refineries on the Texas Coast, Hurricane Nate was expected to hit the heart of the US Gulf of Mexico oil and gas producing region. The GOM region currently accounts for nearly 17% of the daily oil and 5% of the daily gas output in the US. As expected, oil production of 1.61 million barrels per day (Mpbd) and gas production of 2.48 billion cubic feet (Bcf) per day had to remain shut over the weekend as the storm hit the Gulf Coast((Hurricane Nate Threathens Gulf Coast Energy Sites Spared By Harvey, Reuters, 7th October 2017)). Further, the storm was predicted to impact about 15% of the US refining capacity in the New Orleans area, Mississippi, and Alabama. Exxon Mobil, the world’s largest publicly traded oil company, which has one of its biggest refineries – the Baton Rouge facility – with a capacity of more than 500,000 barrels a day, was expected to suspend operations due to the hurricane.

Hurricane Nate Fizzles Out

Having made its second landfall on the Gulf Coast on Sunday, Hurricane Nate is believed to have lost some of its force and is expected to be less dangerous than was previously predicted. This turned into good news for energy companies, who had curtailed their operations in the Gulf region in anticipation of the hurricane. Offshore drillers such as Chevron and Shell have re-deployed personnel to the offshore platforms to restore operations in the region. Chevron is also assessing the impact of the storm on its 340,000-barrel-per-day Pascagoula refinery in Mississippi and its pipelines and terminals before bringing them back to service. Anadarko is expected to resume production as soon and as safely as possible. Overall, the oil and gas production in the Gulf of Mexico is likely to recover fully by the end of this week, according to industry experts. This implies that despite the production disruptions, the US oil and gas output will not see a significant decline.

Impact On Commodity Prices

As mentioned earlier, Hurricane Nate is expected to be less devastating than it was predicted by the authorities. As a result, energy companies that had to curtail their production in the Gulf region due to the expected rains and winds are resuming their operations as quickly as possible to mitigate the loss of production they had borne due to Hurricane Harvey last month. Accordingly, we expect the US oil output to remain unaffected by Hurricane Nate, unlike Hurricane Harvey due to which the overall US oil production dropped 1.5% in the month of September.

Source: US Energy Information Administration (EIA)

In terms of commodity prices, WTI oil prices have been volatile over the last one month due to the continued threat of various storms and hurricanes in key production areas of the US. For instance, the benchmark oil prices fell from close to $50 per barrel at the beginning of August to $46 per barrel in the last week of the month due to the damage and loss of production caused by Hurricane Harvey. However, the oil prices have not dropped as sharply in anticipation of the Hurricane Nate. WTI prices are currently trading at a little under $50 per barrel, which is only 2% lower than the price at the beginning of October. Further, with the storm moving inland and losing its force, the offshore production that was curtailed in the Gulf of Mexico is expected to be restored within the next couple of days. Besides, the majority of the refineries on the Gulf Coast are likely to remain operational as the storm takes it course. Consequently, we estimate that the commodity prices will largely remain unaffected by this natural disaster and expect demand and supply factors to continue to derive the overall commodity prices.

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