Investor Alert

Aug. 24, 2020, 4:51 p.m. EDT

Oil companies brace for twin Gulf Coast storms

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By Rebecca Elliott

Oil companies have shut in roughly 82% of offshore oil production in the Gulf of Mexico and are securing refineries and petrochemical plants as two tropical storms barrel toward Louisiana and Texas.

Tropical Storm Marco approached the Louisiana coast Monday afternoon, while Tropical Storm Laura is poised to strengthen into a hurricane Tuesday as it sweeps across the Gulf of Mexico before nearing the Louisiana and Texas coastline late Wednesday, according to the National Oceanic and Atmospheric Administration.

The region is the heart of America's fuel-making and chemicals corridor, home to nearly half of the nation's refining capacity, according to the Energy Information Administration. Roughly 1.5 million barrels a day worth of oil output in the Gulf had been shut off as of Monday, according to the Bureau of Safety and Environmental Enforcement, or around 14% of the oil produced in the U.S.

Gulf Coast refineries, typically located in low-lying coastal areas, are vulnerable to both wind damage that affects power grids and prolonged flooding that can affect pumps and other ground-level equipment. Hurricane Harvey, for example, forced roughly a quarter of U.S. refining capacity to close in 2017 when the storm inundated the Houston area.

Chemical facilities face similar dangers, but a temporary loss of some petrochemical products isn't likely to affect consumers, analysts said.

If the path of Laura, expected to be the more powerful of the two storms, moves further into Texas, the impact on U.S. refineries could be more significant, said Andy Lipow, an oil analyst at Lipow Oil Associates LLC in Houston. But Mr. Lipow said he didn't expect a substantial supply disruption from either storm as inventories of gasoline and diesel were both well above last year's levels.

Severe weather can send prices at the pump soaring, but American drivers are unlikely to see major impacts this time around because demand remains depressed due to Covid-19, fuel stockpiles are high and refiners elsewhere likely could pick up any slack.

"If there is an impact from the storm, it's more likely to be local outages, local disruption," said Patrick De Haan, head of petroleum analysis for GasBuddy, referring to Laura. "It should not be a pricing event."

U.S. benchmark oil prices increased less than 1% Monday, to nearly $43 a barrel. Regular gasoline prices averaged about $2.20 a gallon, according to GasBuddy, around 15% below year-ago prices.

U.S. fuel makers have already reduced processing this year in light of weak demand due to the coronavirus pandemic. If the tropical storms cause refineries to shut down in parts of Louisiana, for example, refiners in the Houston area could easily ramp up fuel production, said Sandy Fielden, an analyst at financial services firm Morningstar Inc.

"There's no shortage of product," Mr. Fielden said. "It's not a tight market."

U.S. refiners were operating at around 81% of capacity in mid-August, down from around 96% a year earlier, according to the EIA.

Offshore, Exxon Mobil Corp. has evacuated personnel from its one Gulf of Mexico platform, with minimal impact to its production, while the company's Gulf Coast refinery operations were normal, spokesman Todd Spitler said.

"ExxonMobil is closely monitoring the storms and continues to prepare for severe weather at offshore and coastal operations in the Gulf of Mexico," Mr. Spitler said.

Royal Dutch Shell PLC, meanwhile, had paused production at all but one of the nine assets it operates in the Gulf of Mexico and evacuated nonessential personnel. Chevron Corp. also pumped the brakes on offshore production in the region and evacuated employees and contractors.

BP PLC shut in Gulf of Mexico production and evacuated people working offshore as well as those at a facility near New Orleans.

Colonial Pipeline Co., which ships fuels into the northeast U.S. from the Houston area, said it was in contact with refiners and didn't have plans to shut down any portion of its system.

Write to Rebecca Elliott at rebecca.elliott@wsj.com and Collin Eaton at collin.eaton@wsj.com

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