Gas prices could rise by $1 per gallon or more in the wake of Harvey

  • The energy industry has faced hurricanes before like Katrina and Rita but Harvey is a different animal.
  • The amount of rain and flooding that has been unleashed on Houston and surrounding parts of Texas is a worst-case-scenario.
  • Gasoline prices are already rising but that could accelerate if the next worst-case scenario emerges.

The energy industry has had to deal with severe hurricanes in the past, with notable named storms like Katrina and Rita. But Harvey is a different animal.

Harvey has been identified as a 1,000-year flooding event, which has been caused by prolific amounts of rain.

Last week, there was speculation that incredible amounts of rain — upwards of four feet — could be visited upon parts of Texas. As we are witnessing, those worst-case scenarios are coming to pass.

There is another round of potential, worst-case scenario rain amounts ahead for the Houston area, with upwards of 20 more inches of rain possible, if Harvey stumbles back into the Gulf of Mexico, strengthens, and returns to the very area it just raked.

With just about all the other previous hurricanes, refiners came through with minimal damage. They are engineered to withstand significant storm gusts, and, structurally, it appears, that is what happened this time around.

"The gasoline price rise will accelerate, if the next worst-case scenario emerges."

However, the epic flooding in the region is atypical, and the delay in repopulating the facilities with personnel could inhibit the return to service of the affected refineries for weeks to come.

Crude-oil prices are already down significantly on the sudden loss in demand from the region's refiners, and the price of gasoline is rising steadily.

The gasoline price rise will accelerate, if the next worst-case scenario emerges.

Texas and the Southeast are the most vulnerable to the greatest price rise, as those states are served primarily by the Gulf Coast refiners. The West Coast, Upper Midwest, and East Coast have their own refining assets that provide a good deal of their supply, and the East Coast can get increased supplies from Europe, rather easily.

So far, pipelines that carry refined products supplies across the Southeast and up into the Northeast, continue to operate, unaffected by the outages.

It is only a matter of time before the outage beings to register more fulsomely across the country at the pump.

Storms of this type are usually more widespread in their destruction, causing demand to be impinged by people fleeing and staying put in one location for a time. This storm is myopic in its impact, leaving the bulk of the country to carry on with strong seasonal gasoline demand, except for only Southeast Texas.

Absent a rapid return to service of the refineries in the region, gasoline prices could easily rise by $1.00 per gallon or more with spot shortages in some locations, especially in the Southeast.

The next several days will be critical in determining whether a severe, upward price spike is visited upon consumers, as we head into the last major holiday weekend of the summer driving period.

Estimates of rain amounts from round two of Harvey have been lowered, giving hope that a reversal of fortune is in store, but the forecast amounts remain significant.

Still, Texans are beyond resilient, and you can be sure that they will not allow a hurricane of any size to keep them, their communities, or industries down for very long. That is the good news.

Commentary by John Kilduff, a partner at Again Capital, an investment-management firm that specializes in commodities. Follow him on Twitter @KilduffReport.

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