SnapChart – Based on Hurricane Katrina, Harvey Could Impact Oil and Gas Markets for Months

Hurricane Harvey is looking like it could be just as devastating as Katrina was in 2005. The following ARC SnapChart looks back on Katrina’s impact on oil and gas markets in 2005, helping to frame the potential consequences that can result from tragic storms in the energy-rich US Gulf Coast.

Katrina landed in the United States nearly 12 years ago to the day as Harvey. Refineries were shut down and petroleum run rates fell when the storm hit and continued to decline for another month afterwards before bottoming. At the low point, one-quarter of all US refinery runs had been lost, equal to 4 MMB/d. While opinions vary, estimates are that over 2 MMB/d of refinery capacity is currently shuttered from Harvey.

Similar to today, the loss of refinery runs caused a spike in retail gasoline prices. After the storm, the average US gasoline price increased more than 10%. Prices stayed elevated until the end of November, when US Gulf Coast refiners were able to return to normal operations.

In the first half of 2005 the US Gulf of Mexico produced 1.5 MMB/d, equal to 30% of the US total, while Louisiana and Texas onshore production added another 1.3 MMB/d. After Katrina hit, US production declined steadily, dropping 1.5 MMB/d under pre-storm levels by the end of September; most of the losses came from offshore. The price of WTI and heavier crude oil grades did not change much as a result of the storm.

For context, the US Gulf of Mexico currently produces 1.7 MMB/d of crude oil, equal to 18% of the US total. Texas and Louisiana oil production is now nearly three times greater than in 2005, totaling close to 3.5 MMB/d. As of yesterday, the US government reported that 0.3 MMB/d of Gulf of Mexico production was offline. While Harvey has forced some Eagle Ford offline, it is still uncertain what fraction of the 1.4 MMB/d of total production is impacted.

Katrina also curtailed US natural gas production by over 9 Bcf/d, equal to 18% of the US total. Similar to crude oil, most of the production losses were from the US Gulf of Mexico, with smaller losses from onshore production. The supply shortage caused Henry Hub gas price to spike, going from almost $US 10/ MMBtu before the storm to $US 14/MMBtu in September. Today, the North American shale gas revolution has diminished the importance of the US Gulf of Mexico production; currently offshore natural gas is only 4% of the US total and consequently, Harvey is not expected to impact gas markets the way Katrina did. As of yesterday, the US government reported that 0.6 Bcf/d of Gulf of Mexico natural gas production was shuttered.

The history of Katrina provides insight on the potential implications from devastating tropical storms. One of the unexpected learnings is the duration of the outages. Production and refinery runs took time to be restored; in fact, output fell for a full month after the storm hit. Plus, it took about three months before operations returned to more normal levels.