The Strategist

Hurricane Harvey couldn't shatter the American oil market

08/29/2017 - 15:22

Hurricane Harvey hit the Gulf of Mexico, but oil did not go up. Traders, specializing in energy, believe that these are the consequences of the slate revolution.

U.S. Energy Information Administration
U.S. Energy Information Administration
The hurricane of the fourth category hit the Texas coast of the Gulf of Mexico on Friday, and market participants immediately gave their assessment of what is happening: futures for Texas crude WTI fell sharply.

Phil Flynn, a senior analyst at the Price Futures Group, told MarketWatch: "American shale has greatly reduced our dependence on oil and gas production in the Gulf of Mexico."

According to the latest data from the US Energy Information Administration, the Gulf of Mexico region accounts for 17% of total oil production and 5% of the country's natural gas production. For comparison: in 2016, about 48% of the total volume of oil production in the US and 60% of gas production accounted for hydrocarbons contained in solid rocks, including shale.

Michael Tran, an analyst with RBC Capital Markets, notes that 10 years ago, before the shale boom, more than 30% of all American oil was produced in the Gulf of Mexico: "Simply put, much less part of American oil production is at risk today. Moreover, a significant part of the oil produced in the Gulf of Mexico was exported to Asia this year. " 

But if mining in the Gulf of Mexico does not already have such decisive importance, this cannot be said for processing. That is why the futures for oil fell, and futures for gasoline went up. Richard Hastings, a specialist in macroeconomic strategy at Seaport Global Securities, comments: "It's interesting that the risks have partly migrated from the coast to the country, to the [shale fields] of Marcellus and Utica, and to the Perm basin in western Texas. At the same time, the oil refining industry is still largely concentrated in the Gulf of Mexico, and this is very difficult to change. "

According to the US Energy Information Administration, more than 45% of the country's oil refining capacity, as well as 51% of the natural gas processing industry, is located along the coast of the Gulf of Mexico.

James Williams, an economics specialist in energy at WTRG Economics, said that, according to the latest data, the processing capacity of 2 million barrels per day was disrupted. Williams does not expect that the growth in oil reserves will be so significant, given the decline in production in the Gulf of Mexico. In his view, given the weakening demand from refineries and the decline in production in the Gulf of Mexico, which the Environmental Compliance Office estimated at 331,370 barrels a day, the growth in oil reserves "will slightly exceed 10 million barrels per week." In addition, he notes that Hurricane Harvey caused less damage to the shelf production than the hurricanes Ivan in 2004 and Katrina in 2005. According to Williams, the peak losses in the case of Ivan were about 1 million barrels, while the hurricanes Katrina and Rita together reduced production by more than 1.5 million barrels per day. In this sense, Harvey was relatively harmless - only 400 thousand barrels a day.

However, now that the US has become an oil exporter, hurricanes in the Gulf of Mexico began to affect not only the American market (this is the first such hurricane). On Monday, the divergence of prices between North Sea oil Brent and American WTI exceeded $ 5 per barrel.

Flynn notes: "Oil refining in Europe is growing, and many refineries will try to compensate for shortages from American plants." At the same time, the price difference between WTI and Brent may reduce the attractiveness of oil exports to the US for many suppliers. Jay Hatfield, portfolio manager for the InfraCap MLP exchange fund, said: "With such a large price difference, incentives for exporting oil to the United States are reduced." He adds that this is likely to "lead to a reduction in US inventories and, ultimately, to a rise in prices for WTI."