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Harvey shuts down largest US oil refinery, bears down on Louisiana plants

  • Tropical Storm Harvey has shuttered about 20 percent of U.S. refining capacity.
  • Motiva shut down its Port Arthur, Texas, refinery, the largest in the United States, and three other area refiners were also closed.
  • Refiners in Corpus Christi, Texas, are aiming to restart, but facilities in the Houston area remain largely closed.

The largest U.S. oil refinery began shutting down on Wednesday as Tropical Storm Harvey continued to batter southern Texas and made another landfall on the Gulf Coast, threatening a stretch of the refining hub in Louisiana.

Oil market analysts projected that about 20 percent of the country's capacity to refine crude oil into gasoline, diesel and other fuels was not operating Wednesday. There were few reports of serious damage to refineries on Tuesday, but flooding and continued rain made it unclear when workers would be able to reach facilities.

Closures at major refineries in the Beaumont and Port Arthur area north of Houston took even more U.S. refining capacity offline. The area, home to about 8.5 percent of total U.S. refining capacity, experienced heavy rainfall and flooding Tuesday.

NOAA Weather Forecast

Saudi Aramco-owned Motiva began a controlled shutdown of its Port Arthur facility around 5 a.m. ET on Wednesday, having gradually reduced capacity to 40 percent by Tuesday night. The 600,000 barrel-a-day refinery is the largest in the United States.

Exxon Mobil also closed its 363,000 barrel-a-day Beaumont refinery. Valero and Total were also suspending operations at refineries in the area.

"I'm actually quite concerned about Beaumont-Port Arthur because they just got a huge amount of rain in 24 hours, and we've already seen flooding within the refineries themselves, so we don't know exactly how bad it's going to be," said Andy Lipow, president of Lipow Oil Associates.

"If it is bad, you're looking at six to eight weeks of outages over in Beaumont-Port Arthur," he told CNBC's "Squawk Box" on Wednesday.

Lake Charles, Louisiana, was bracing for severe flooding as Harvey made landfall Wednesday along the Texas-Louisiana border. Another 4 percent of U.S. refining capacity is located in the city.

Citgo and Phillips 66 were both operating their Lake Charles area facilities at reduced capacities, while Calcasieu shut down its Lake Charles refinery, according to Lipow Oil Associates.

Refineries in some parts of Texas slammed by Tropical Storm Harvey were aiming to start back up, though lingering problems restoring power could delay those efforts, Lipow said.

Valero and Citgo indicated they are trying to restart operations in the next few days at facilities in Corpus Christi, Texas, near where Harvey made landfall overnight Friday as a Category 4 Hurricane.

Houston plants appeared to suffer minimal damage, but were producing very few products because their access to oil is limited. The region is capable of refining about 2.7 million barrels a day of crude, or about 14 percent of total U.S. capacity. It could take refiners in the Houston area 14 to 17 days to fully recover, Lipow estimated.

Harvey has affected 31 percent of the total U.S. refining capacity, taking into account facilities that have not shut down entirely, but throttled back operations, Lipow said.

It took one to two months for refineries to return to normal production after Hurricane Katrina knocked out about 30 percent of U.S. refining capacity when it struck the Gulf Coast in 2005, according to Tamar Essner, director of energy and utilities at Nasdaq Corporate Solutions.

Harvey could knock out just as much capacity as it moves into Louisiana, said Daniel Yergin, vice chairman of IHS Markit. However, the picture is different today because Texas produces much more oil than it did 12 years ago, creating a more complicated logistical network, he explained.

"The question is will they be able to move oil to the refineries, or is there going to be a backup of the system," he told CNBC. "And then on the other side is the question, what products will be available to move through the Colonial Pipeline and other pipleine systems, including to the Northeast?"

The Colonial Pipeline, which transports fuel from the Gulf Coast to the Southeast and further north, was operating at reduced capacity due to supply disruptions from Houston-area refiners. Colonial also reported storm-related damage at its Pasadena, Houston and Cedar Bayou facilities in Texas.

The effect on gasoline prices for much of the nation is a moving target at this point.

Oil Price Information Service reported that prices for wholesale gasoline that moves through the Colonial Pipeline had reached a new 2017 high this week. U.S. gasoline traded at the New York Mercantile Exchange hit the highest levels since July 2015.

The price that consumers pay at the pump is likely to go up 2.5 cents every day for the next five to seven days, according to Lipow.

U.S. oil prices have slumped more than 5 percent since Thursday. Refinery shutdowns mean there is lower demand for crude, and U.S. stockpiles are likely to rise.