Market Insider

The whole world is feeling the pinch after Harvey knocks Texas energy offline

Key Points
  • Harvey's hit to logistics and refining highlights how important the U.S. has become to the global energy market, as an exporter of both oil and refined products like gasoline and diesel fuel.
  • More than 20 percent of U.S. refining capacity is offline due to the storm, and it could be several weeks before refineries are back up and running even if they are not damaged.
Largest refinery in the US to shut down following flash flooding in Texas

The whole world is feeling the pinch of the shutdown of the Texas energy industry.

The logistics that move oil and fuel are snarled—or just not operating at all—after Harvey's catastrophic flooding caused widespread outages of energy operations along the Gulf Coast. The shutdowns have the potential to ripple across the global supply chain and impact prices. As of Wednesday, well over 20 percent of U.S. refining capacity was shut down.

Harvey shows just how important the U.S. has become to the world's energy supply.

In the nine years since the last major hurricane hit Texas, the U.S. has nearly doubled the amount of crude it drills to the point where it now challenges Russia and Saudi Arabia in the top tier of oil producers. It has also turned from being an importer of gasoline and diesel to being a net exporter on a major scale, sending cargoes to far-flung places like Mexico, Brazil, Belgium and China.

Texas itself was producing just about 1 million barrels of crude oil from its wells each day when it was hit by Hurricane Ike in 2008. As Harvey arrived last weekend, its oil field production topped 3.4 million barrels a day — more than most OPEC members including Angola, Kuwait, Nigeria, Libya and the United Arab Emirates.

The U.S. has also added 2 million barrels a day of refining capacity in recent years, much of it in facilities along the Gulf coast. The U.S. refines 17.5 million barrels a day of crude, turning it into gasoline, diesel and jet fuel.

"The whole logistics of the global industry has changed dramatically over the last decade," said Daniel Yergin, vice chairman of IHS Markit. "There are refineries in China that depend on U.S. crude oil. U.S. refined products go to Latin America. The U.S. exports distillates to Europe."

In the week before Harvey hit, the U.S. exported 936,000 barrels a day of crude oil and 693,000 barrels of gasoline a day. The U.S. consumes over 9 million barrels of gasoline a day. Now, the Houston Shipping Channel is closed, tankers are not moving, and oil that is being drilled is not able to move into refineries.

Crude oil inventories down 5.4 million barrels

"Harvey's impact is in the process of going global, as buyers of U.S. crude and refined product now have to scramble to cover. Remember the U.S. was one source of diversification away from OPEC for Asian buyers," said John Kilduff, energy analyst with Again Capital. The Gulf Coast is home to about 46 percent of U.S. refining capacity.

The heart of that industry is in Houston, which has seen neighborhood after neighborhood flooded and thousands left homeless. Major arteries have been paralyzed by an unprecedented volume of water, and an untold amount of damage has been done to infrastructure, homes, offices and other commercial buildings.

"There's a group of people who are quick to say the industry is resilient and that everybody is going to bounce back," said Michael Cohen, head of commodities strategy at Barclays. "The impact to Houston as the U.S. energy hub I don't think can be discounted...The return to normal is going to take a while and that applies to the energy industry as well."

The U.S. became a major fuel exporter very quickly. Exports of refined products since the beginning of the year are up 30 percent since last year. "Really we've become a net exporter of refined product since 2012, and that was really when you had the step change in import, export flow," said Suzanne Minter, the director of client strategy at S&P Global Platts.

She said the U.S. is a net exporter of 2.6 million barrels of refined products a day, up from 1.7 million barrels a day in 2015. That includes gasoline, diesel and other fuels.

Minter said the reduced refining output at Texas and Louisiana refineries is also creating an imbalance in the global crude market. Gulf Coast refiners are dependent on heavy crude that is imported to the U.S. and used as the raw material to make gasoline and other fuel, while the U.S. exports a lighter grade.

"Texas alone takes in 1.9 million barrels a day," she said, adding that oil is now sitting outside the U.S., unable to come in.

Famed commodities watcher Dan Yergin says this is when key Texas refineries will come back online

Minter said if the refiners can get back on line, they still need transportation channels to operate normally so they can distribute the product. "I think we really now are in a wait and see mode. We really have to see how long it takes before the import and export channels can flow again."

Since just before Harvey, gasoline futures have risen, with New York harbor gasoline up about 30 percent to $1.90 per gallon. Gulf Coast spot crude was up even more, gaining 50 cents in the past week, to $1.98 per gallon Wednesday.

Those increases have not made it to the pump yet, with the national average price for gasoline up just six cents in the past week, to $2.40 a gallon, but analysts say it could rise above $2.80 a gallon or more, depending on refinery damage.

There were much bigger spikes in the aftermath of Katrina and Ike, said Tom Kloza, a global energy analyst at Oil Pride Information Service. After Ike, gas prices jumped $1.50. The fact that gas hasn't jumped that much yet "is a testament to a much broader refining industry and probably more sophistication across trading," he said.

Oil prices have fallen, reflecting the sudden drop in demand from idled refineries. The price of West Texas Intermediate oil, the U.S. benchmark, has fallen to just above $46 per barrel. It trades at a growing discount to international Brent, which was about $51.44 a barrel late Tuesday.

WTI is trading lower because it reflects landlocked U.S. crude.

Analysts said the outlook for the Gulf Coast refining industry will be unclear until the rain stops and employees are able to return. It will take several days for the industry to assess whether there has been serious damage to equipment.

Gasoline continues to make its way out of the area but slowly. The Colonial Pipeline, a major gasoline artery to the east coast, reduced capacity because of limited supply from Houston and storm related damage at its Pasadena, Houston, and Cedar Bayou facilities in Texas.

"Before all is said and done with, 31 percent of the nation's refining capacity is significantly affected, resulting in a reduction of crude oil processing in excess of five million barrels a day," said Andrew Lipow, president of Lipow Oil Associates.

"It makes a difference in price to lots of markets because Mexico has become such a large importer of gasoline from the Gulf Coast, and the U.S. Gulf Coast is shut down," Lipow added. "They are now in other markets like the European market, seeking gasoline supplies. Mexico is now competing for gasoline that would have gone into New York harbor," Lipow said. Mexico also exports crude oil into the U.S.

"There are so many tankers that are just sitting out there waiting for the storm to clear, and for the ports to reopen," said Lipow. "We're already seeing in Corpus Christi that it's going to take weeks to get these refineries back on line…and in Houston, we're just praying they don't get flooded."

Lipow also said gasoline shipments that would have gone to Florida from the Gulf Coast could now be covered by shipments from the Mid-Atlantic or European shipments that would have headed to the mid-Atlantic.

Another problem is that U.S. oil supplies could keep growing as production continues, adding to price declines. "There has to be somebody at a refinery to receive oil from the Permian or Eagle Ford shale. If refiners aren't operating, that's going to back up," Yergin said.

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