Market Insider

Hurricane Harvey could be major storm, threatening one-third of US refining capacity

Key Points
  • Hurricane Harvey is heading toward the Gulf Coast and could become a major Category 3 hurricane by Friday.
  • The storm's track, while still unpredictable, appears to be heading south of Houston but could dump 12 to 20 inches of rain or more across a broad area of the Texas coastline.
  • The coastline between Corpus Christi, Texas and Lake Charles, La. is home to about a third of U.S. refining capacity.
  • Gasoline futures jumped Thursday, and traders expect more upward pressure as the storm gets closer to Texas. Oil prices, however, fell because refiners may use less supply due to the storm.
Storm springs back to life in the Gulf, now threatens one-third of US refining capacity
Storm springs back to life in the Gulf, now threatens one-third of US refining capacity

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.

As summer winds down so does the price of gasoline
As summer winds down so does the price of gasoline

Even if the storm does not do significant damage, it could still cause the industry to scramble to take operations offline. A big storm surge could also create problems in the Houston shipping channel that delay deliveries and shipments.

"It could still be disruptive. You can't have this magnitude of potential shut-ins without seeing prices go up," said John Kilduff, energy analyst with Again Capital. "This could be a hiccup. It will be temporary, but it could be a hell of a spike."

Meisel also said there was a model showing rainfall of up to four feet so the danger is unpredictable intense areas of flooding.

"You'll get really intense bands of rainfall that are really narrow. What you can get are pretty crazy totals of rainfall differences across a very small area. That's where the main uncertainty lies right now," said Meisel.

"We're pretty convinced that the storm will make landfall in southern or coastal Texas," he said. "...The question is where do those bands show up."

Meisel said the hurricane is expected to make landfall late Friday, early Saturday morning, but while the exact location is unclear there's a good chance now that it will be southwest of Houston. "It could be closer to Corpus Christi but the main impact will be on the northeastern side. It looks like the most rain is going to be Houston," said Meisel.

Meisel said as the storm approaches land there's a chance it could slowdown and stall. That would add to the rain risk.

"Over the next couple of days, it's a giant circle over Texas and over the Gulf of Mexico. Most forecasts show it remaining on land," he said.

But there are some outlier forecasts that show potential for a serious pattern. This is a low confidence forecast but something to watch.

"Even after initial landfall, some models are showing the storm re-emerging into the Gulf of Mexico and then making landfall again over western Louisiana," he said, adding that would be the worst case scenario and would bring even more refineries into play.

Kilduff said there could be shut-ins due to power loss or just the inability for workers to reach refining areas, which line the coast.

Harvey's potential path into Texas coast

Source: EIA/Bespoke

Brown dots—offshore/onshore oil wells

Blue dots—offshore/onshore natural gas wells

Flames—natural gas processing plants

Brown squares with barrels of oil—petroleum refineries

—Reuters and the Associated Press contributed to this report.

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