How Hurricane Laura Could Impact Oil Prices And Equities

As Hurricane Laura approaches the Texas-Louisiana coast for an expected landfall tonight or tomorrow morning, our first thoughts must be with the people who live in the areas that will be impacted. The hurricane has been strengthening and may hit land as a category 4, capable of severe damage. The whole country should be wishing the people of the Gulf Coast all the best. 

Among those not in the path of this storm, many people wonder how it will impact investments and wallets, especially since the region is most important oil and petroleum location in the United States. Here is how Laura will affect the markets and the gas pump: 

Crude Oil and Natural Gas Production Disruption 

Already, around 1.6 million barrels per day of offshore crude oil production has been halted, as crews on platforms in the Gulf of Mexico have been evacuated inland. That amounts to about 84% of U.S. offshore crude oil production in the Gulf of Mexico. Additionally, producers have halted about 1.65 billion cubic feet per day of natural gas production from the Gulf of Mexico. 

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Offshore platforms are sturdy and built to withstand these storms. After all, hurricanes are expected in the Gulf of Mexico. However, even if a platform goes undamaged during as the hurricane passes, production cannot restart until the personnel return. 

Currently, the price of WTI is barely moving as traders wait to see the impact of Laura (and possibly because the country is distracted by the political conventions, discussions about race, civil unrest and the virus). However, as a result of the disruptions—even if they are short term—U.S. crude oil production numbers next week will appear low. This will almost definitely send the price of WTI up, even if only for a brief bump. 

But do not look for the decreased crude production to impact gasoline prices much. There is plenty of crude in inventory to make up for lost production, and the production disruptions will likely be short. Gasoline prices will be impacted more by refinery issues. 

Refinery Disruptions and the Price at the Gas Pump 

15% of U.S. refining capacity (2.2 million barrels per day) has been shut down in preparation for the hurricane. The largest refiner in the country is Motiva, owned by Saudi Aramco, and it is in Port Arthur, Texas. That is right near the middle of the hurricane’s cone of uncertainty. The area is full of oil refineries (about 1/3 of total U.S. refining capacity) and pipelines to feed the refineries and to send gasoline into the country. 

The longer the refineries stay down, the more gas prices will be pushed up. In 2017, Hurricane Harvey caused flooding at Motiva and other facilities in the area, disrupting gasonline supplies. On the other hand, gasoline storage is so high right now that it could mitigate any disruption. Inventory is 5% above the five year average. GasBuddy, the gas-station price phone app that follows trends in gasoline pricing, forecasts that the nationally the average price of gasoline could increase by 5-10 cents per gallon. The southeast would see the highest increases in prices at the pump. Of course, this is all dependent on the severity of the damage caused by the storm, and that can be unpredictable. 

Equities Like Higher Oil Prices 

Typically, these Gulf of Mexico hurricanes can be good news for price of oil equities. Even if some of a company’s production or refining capacity is disrupted, the higher commodity prices are generally a good sign for oil company stock. Equities such as ExxonMobil, Chevron and BP are all down a little today. However, if the price of oil rises as a result of disruptions (or as a result of the reporting of production numbers next week), it will be seen as good news for these international oil companies. That extent of that good news would have to be weighed against issues in the overall oil industry today, but higher oil prices are good for oil company stocks.

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