PORTLAND MARKET REPORT
SEPTEMBER IN VIEW
HURRICANE IDA – WHY THE IMPACT HAS BEEN A STORM IN A TEACUP COMPARED WITH KATRINA
The beginning of September was marked by the Category 4 , Atlantic Hurricane , ‘ Ida ’. As well as causing enormous damage and loss of life across the United States , the hurricane sparked immediate comparisons with Hurricane Katrina , which hit Louisiana and New Orleans 16 years before almost to the day . The initial impact of both events on oil and gas infrastructure was very similar , with huge swathes of both offshore and onshore production being taken out of action . Yet , when it came to prices , there were no similarities , with oil markets in September 2005 behaving in an entirely different way to September 2021 .
In 2005 , Hurricane Katrina brought the US oil industry to its knees , with 30 oil platforms and 9 refineries impaired , destroyed or shut down . A full 25 % of total US production was ‘ shut-in ’, along with 20 % of gas production and numerous other related ( and nonrelated ) breakdowns in the commodity supply chain ( petrochemicals , shipping , agricultural commodities etc .). Sadly , there was also considerable environmental damage , with some refinery tanks actually floating off their foundations due to flooding . In total , over 25m litres of oil was spilt in the immediate aftermath of Katrina .
The impact on fuel prices in September 2005 was absolutely electric . The wholesale price of gasoline went up by almost 30 % overnight , from $ 625 per tonne to $ 850 ( an increase of around 10 pence per litre ). On US forecourts the increases were much more severe , with rises of up to $ 4 per gallon ( 55ppl !), leading to many accusations of profiteering . These rapid , and unprecedented , price rises stimulated a very rare event indeed , with the US Government and International Energy Agency combining for only the 2nd time in history ( the first coincided with the First Gulf War ) to make a release of both the global emergency oil reserve and the US Strategic Petroleum Reserve . Around 60m barrels of crude and refined oil ( which equated to 5 days of US consumption ) were allowed to flood the markets ( awkward term considering the circumstances …). It had the desired effect , with fuel prices very soon equalising back down to pre-Katrina levels .
18 Fuel Oil News | October 2021
This month ’ s Hurricane Ida initially looked like it would cause a similar amount of chaos . 150mph winds battered the Gulf Coast and nearly all production facilities were shut down , along with the same 9 refineries of 2005 . Power cuts across the region meant not only did over a million people have no electricity , but industrial output also ground to a halt . Even those refiners outside of the ‘ hurricane alley ’ were affected as , without electricity , they had to rely on emergency power supplies which led to very minimal capacity throughputs .
“ WHY WAS THE IMPACT ON OIL PRICES SO MUTED ?”
Despite all this , oil prices in September were almost boring in comparison to September 2005 . There were no great price movements in either direction and the restrained response of the US Petroleum Reserve was to make a ‘ mini-release ’ of 2m barrels ( whilst the IEA remained completely on the side-lines ). Those market observers who were predicting the worst when Hurricane Ida hit , were soon scratching their heads and asking why the impact on oil prices was so muted ?
The first , obvious , answer is that many Gulf Coast refineries found themselves just outside the hurricane ’ s path , meaning that only a precautionary shut-down was required followed by a reasonably quick restart of operations . Equally , many oil platforms and refineries shut down in advance of the hurricane ( rather than being hit mid-production ) and all of them had worked on engineering and operational resilience in the years between Katrina and Ida . This beefing up and structural reinforcing of engineering apparatus was also evident when it came to much of Louisiana ’ s state infrastructure . For example , unlike in 2005 , none of the state ’ s flood levees were breached , meaning that no production facilities were meaningfully flooded . As a result , oil spillages were negligible .
Nonetheless , to remove so much oil production from US markets and see barely a ripple of subsequent price movement is surprising and says much about the increasing diversity of the US supply chain . The proliferation of shale over the last 10 years ( an industry that didn ’ t exist in 2005 ) has broadened the base of US oil production , whilst refineries in Texas , New Mexico and the Mid-West have reduced the previous refining domination of the US Gulf Coast . In addition , those same Gulf Coast refineries have been exporting much of their volume since 2016 ( prior to which it was illegal to export oil from the USA ) and , post-Ida , much of the volume earmarked for export was simply diverted back into domestic markets . Finally , it is worth noting that oil-fired power stations in the US South are now a thing of the past ( not the case in 2005 ), an element of commercial transport ( including rail ) is now powered by natural gas and , today , 10 % of American gasoline is ethanol . Although difficult to quantify these factors , they do nonetheless highlight that production pressures on neat crude and refined products have shifted since 2005 .
Of course , oil prices could still go northwards if the long-term effects of the hurricane start to hamper production recovery . Even as we write this report , half of capacity remains offline , and analysts are predicting a total reduction in production of around 500,000 barrels per day in September . That coincidentally ( ha ha !) is the exact same amount that OPEC announced they would release into global markets in the aftermath of Ida . This was done under the guise of protecting the market from price spikes , but of course we all know that it was a swift and opportunist move to steal market share from crippled US operators !
For more pricing information , see page 22
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