The energy industry is closely watching a rapidly developing hurricane that could become the first hurricane to make landfall in Texas in nine years and dump as much as two feet of rain on the heart of the U.S. refining industry.
If Harvey becomes a major Category 3 hurricane, as now expected, it would be the first to come ashore in Texas since Hurricane Ike in 2008. Harvey was upgraded to a hurricane Thursday afternoon and was heading towards the U.S. Gulf Coast, fueled by warmer than usual water temperatures.
Nearly half of U.S. refining capacity is on the U.S. Gulf Coast from Alabama to Texas, and nearly one-third of U.S. capacity appears to be in Harvey's path on the Texas and western Louisiana coastlines. Even if the storm does not become a major hurricane, it could be a considerable flooding event that could disrupt refining and possibly drilling operations.
A hurricane warning was first issued early Thursday for a section of Texas' Gulf Coast as Harvey approached, covering an area from Port Mansfield to Matagorda. Texas, meanwhile, declared a state of emergency for 30 counties in anticipation of the threat.
Believed to be a minor hurricane Wednesday, the National Hurricane Center significantly upgraded its potential strength late Thursday morning, catching some in the energy market unaware. The National Hurricane Center said its wind forecast now shows sustained winds could be up to 115 mph. It forecast 12 to 20 inches of rain with some areas potentially seeing as much as 30 inches.
By early Thursday, Harvey was about 370 miles (600 km) southeast of Port Mansfield, Texas, with maximum sustained winds of 45 mph, the U.S. National Hurricane Center said.
"The main danger with this storm does not seem to be wind, it is the amount of rain and it looks set to stall over the Texas coast," said Jacob Meisel, Bespoke Weather Services' chief weather analyst. "This is something we're watching even for onshore [drilling]."
Gasoline futures rose on the NYMEX and spot prices jumped. Gasoline on the Gulf Coast spot market was trading at $1.59, up nearly 6 cents, and at its highest level since April. Crude futures however were lower, with West Texas Intermediate trading down 2.4 percent to $47.20 per barrel in afternoon trading.
"You're talking about something that might knock down crude oil runs, which is going to deter some exports briefly. That's why you have crude oil down and gasoline up," said Tom Kloza, global head of energy analysis at Oil Price Information Service.
"If it's a Category 3, and it hits a refining center, you literally could have a gasoline price spike that is like 27 cents" a gallon, said "It's a temporary event, but you could have a temporary price shock for portions of the United States that are fed by the Gulf Coast."
Kloza said Corpus Christi refineries would be likely to shut down for precautionary reasons, and Houston operators may as well.
"You're not going to operate a refinery when there's the possibility of storm surge or the threat of losing electricity…They have to shut down. The safe bet is two weeks from now we're going to be talking about much lower gasoline prices," he said.
A major concern is that Harvey came up suddenly, and quickly transformed from remnants of a previous tropical storm into what could be the strongest hurricane to make landfall in the U.S. since Hurricane Wilma came ashore in Florida in August, 2005.
The National Hurricane Center said Harvey was already close to becoming a hurricane late Thursday morning. It issued a storm surge warning for much of the Texas coast, and said surge flooding could reach heights of six to 10 feet between the northern entrance of the Padre Island National Seashore and Sargent, Texas.
"It has a straight shot at the coast with nothing but fuel to strengthen," said Meisel. "The conditions are perfect for rapid intensification because of low wind shear and warmer than average water temperatures."
Meisel said the storm is unpredictable, and the models are varied but an unusually warm water eddy in the western Gulf is providing even more energy for the storm.
"The amount of rain some of our weather models are printing out for this storm are totals that are almost unbelievable," he said. "There's definitely potential for more than 24 inches around the Houston area."
The oil industry was already making preparations, with Anadarko and others pulling workers from its Gulf of Mexico platforms. Harvey looks set to cut across offshore drilling rigs, but it's the refineries that are more at risk.
Magellan Midstream Partners on Thursday said it had suspended operations at its terminal and condensate splitter in Corpus Christi ahead of Tropical Storm Harvey. Flint Hills Resources and Citgo were reported to be shutting down Corpus Christi refineries.
Houston's major refineries include the Marathon Galveston Bay refinery, Phillips 66 Sweeny refinery and Exxon Mobil's Baytown refinery, among others. Phillips 66 and Kinder Morgan said they were reviewing the situation, and Kinder Morgan added it would activate its response plan, as needed.
"This is much more impact on refining, especially if it becomes a flooding event," said Andrew Lipow, president of Lipow Oil Associates. He said the flooding could impact their ability receive shipments or export surplus product.
According to Lipow, 31.6 percent of U.S. refining capacity is located between Lake Charles, Louisiana, and Corpus Christi. He said if the storm becomes a Category 1 hurricane, a rule of thumb is that it could take about a week to restore refining operations, and as much as two weeks if it becomes a Category 2.
Lipow said refiners that are impacted by a Category 3 hurricane can sometimes take two to three weeks to get back to normal. "There is more likely to be evacuations, widespread power outages, wind damage, flooding and difficulty getting workers back to the facilities," he said.