So, it’s one down, 16 to go…
Well, that’s if the US weather forecasters are right and the mooted 17 named tropical storms and hurricanes form in the Atlantic storm season this year.
For some time now, US forecasters have been issuing portents of doom about this year’s season. With the formation of tropical storm Andrea – three weeks ahead of the “official” start of the season on 1 June - these warnings have come sharply into focus.
Why? Well, Andrea formed at exactly the same point in May as tropical storm Adrian did in 2005 – and that year was an utter disaster. Remember New Orleans?
2005 was the most active season since accurate recordkeeping began in 1944. There were 27 named storms including 15 hurricanes, seven of which were classified as Category 3 or higher. The paths of five of these major hurricanes passed through the Gulf of Mexico significantly disrupting oil and natural gas production.
In particular, hurricanes Katrina and Rita crossed through the heart of the Gulf oil producing region, resulting in widespread damage. The US Department of Energy calculated that oil production for the whole year was reduced by 30% and gas production by 21% because of the storm damage.
In addition to the upstream impacts to Gulf production, hurricanes also have a significant impact on midstream and downstream infrastructure. 457 underwater pipelines were damaged in 2005, and the Louisiana Offshore Oil Port had to temporarily stop accepting shipments during both Rita and Katrina.
Even onshore refineries and natural gas processing facilities suffered heavy damage. Immediately after Katrina hit Louisiana, almost 2 million barrels per day of refinery capacity was shut down. This was due to either direct damage or interruption of power supplies.
The US Energy Information Administration estimated that at the height of the refinery outages (September 22-25, 2005), as much as 4.9 million barrels per day of refining capacity (almost 29% of US refining capacity and more than 60% of refining capacity in the Gulf Coast region) was shut.
This damage was serious. As late as 10 October 2005 more than 2 million barrels per day of refining capacity was still out. So, if we believe the meteorologists we may see a repeat of this situation later this year and that will send the oil price soaring. You need to be ready to profit from such a move.
Joe blogs
Perhaps one of the most famous US hurricane watchers is Joe Bastardi of AccuWeather.com. This week he released his updated forecast for the current year.
Bastardi expects, “this season’s hurricanes and tropical storms to pose a far greater threat to lives and property than last year’s; with significantly more storms striking the US.”
Bastardi warned that six or seven storms would strike the US coast. This includes the possibility of multiple strikes by the same storm, such as the way Hurricanes Andrew and Katrina struck Florida before later striking the US Gulf Coast. The majority of these landfalls are projected for the Gulf Coast from the mouth of the Mississippi River to Cape Hatteras, with the centre of the bull’s eye on Florida.
Take a look at Bastardi’s risk map and then compare it with the map below it, which was prepared by the US Government Accountability Office and shows the oil platforms in the Gulf of Mexico. There is a significant overlap of the two. Even the Henry Hub, which is a major junction in the US gas network that is used to determine national prices, is at risk.
I cannot predict the weather accurately – and I suspect that neither can Joe Bastardi. However, I believe what he is saying is very important. The US is short of refining capacity at the best of times, with US refiners have been going through a purple patch as they exploit the economic laws of supply and demand to boost their margins.
Profits at refiners have been soaring. There have been triple-digit gains in refinery stock such as Valero and Tesoro – and I believe that there is much more to come – even if their facilities are damaged by the upcoming inclement weather. The oil majors will also do well – again. If a major hurricane heads to the gulf, I’ll be on my phone to my broker buying integrated oil straight away. What about you?
