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How OPEC Was Hurt By The Hurricanes

offshore rig

Hurricane Irma was downgraded to a tropical storm early Monday, although it is still bringing floods and damage to much of Florida as it makes its way north, leaving millions without power. As for the oil market, the impact of the storm will be felt almost exclusively on demand, with little to no effect on crude oil production or refining.

Goldman Sachs estimates that Hurricanes Harvey and Irma will leave a huge dent in oil demand, an effect that will be felt across the world. The two storms will lead to a reduction in global oil consumption by about 600,000 bpd for the month of September.

The investment bank says that Hurricane Harvey alone will lead to a plunge in oil demand by about 600,000 bpd in September, while Irma will cause demand to decline by 300,000 bpd. That decline is somewhat mitigated by the fact that Texas shale fields also were impacted by Harvey, leading to a production loss of 300,000 bpd. As a result, the net effect of the two storms is projected to be a decline of 600,000 bpd in consumption this month.

Goldman cautioned that its projection, particularly for Irma, is highly uncertain. Irma, at this point, is looking to be much less destructive than many had feared. But because Florida imports the vast majority of its fuel needs, the potential disruptions of major ports on the Florida coast will be pivotal. Even if they reopen quickly, they “will potentially have draft restrictions that may hinder trade flows,” Goldman says. Related: Can WTI Break Out Of The High $40s?

The hit to demand occurs at a time when seasonal factors also lead to a dip in consumption. End of peak summer driving should result in a seasonal decline of an additional 150,000 bpd.

Florida’s power outages will probably be a bigger story going forward, affecting electricity markets and likely cutting into natural gas demand for quite some time. Florida’s major utilities said it could take weeks to repair all the damage and restore power.

The lingering effects of the storm are dynamic though. Disrupted refining capacity along the Gulf Coast, along with the impact on millions of motorists, took a large bite out of oil demand, leading to temporary losses for WTI. The flip side is the threat to drillers could rise if refineries remain offline. Even as a lot of facilities have come back online in Texas, the remaining outages could still force Texas shale drillers to take production offline at some point in the near future. Goldman Sachs says the refining recovery effort in Texas/Louisiana is taking longer than expected, and as of September 11, when it issued its report, the investment bank estimates refinery outages still stand at about 2.24 million barrels per day. Related: Is It Time For OPEC To Turn The Taps Back On?

Another caveat to the prospect of diminished demand from the hurricanes is that the recovery and reconstruction could boost demand, offsetting the initial negative effects. By October, the 900,000 bpd impact narrows to just 300,000 bpd. And based on past hurricanes, demand could actually rise “to a level higher than would have been the case had there been no hurricane, which would translate into a positive demand shock,” Goldman says.

But for now, our working assumption is that global oil demand could be reduced by at least 600,000 bpd in September because of the two hurricanes. Put another way, global oil inventories could see a boost of 600,000 bpd from the storms.

That almost guarantees that OPEC will feel compelled to extend their production cuts beyond the March 2018 expiration date. There have been a series of comments coming from top OPEC officials and energy ministries from OPEC nations regarding the possible extension. Saudi Arabia’s energy minister Khalid al-Falih said over the weekend that he and his counterparts from Venezuela, UAE and Kazakhstan were open to cuts “beyond the first quarter of 2018, if needed.”

Well, the two hurricanes that just hit the U.S. increased the chances that the extension will indeed be needed.

By Nick Cunningham of Oilprice.com

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Leave a comment
  • adec on September 11 2017 said:
    When I saw the title, the name Nick immediately came to my mind. And it turned out to be true. Nick always have a bearish song
  • Dan on September 12 2017 said:
    They are so right. We didn't see 10 million people fleeing the state in unexpected travel and now returning in added travel. That is if there is gasoline available. Well there should be because Goldman says demand is way down. Let's face it, the people pulled out their lawn chairs and just sat there during a hurricane and didn't use any oil to escape and gas stations ran out of fuel because the managers were on vacation. Interesting. Silly us, unable to think without Goldman Sacking.
  • Johnny on September 12 2017 said:
    Hurricane's effect on oil industry is myth.We are talking about hurricane effect in hurricane season....year after year....
  • Bill T on September 13 2017 said:
    I own a small 25 year old oilfield service company. Each year I try to take a number of managers and owners of medium to large(international) oilfield companies that are my customers to lunch and dinner. This is to maintain relationships and thank them for their business. I ask each one of these experienced business people, who all have decades working in the oilfield, the same two questions. I ask them "at this time next year would they be surprised if WTI was $35.00 per barrel?" Everyone of them says "no, they would not be". Then I ask "would you be surprised at this time next year WTI was $65.00 per barrel?" Again they all answer "No, they would not be." Then I read at night articles like this. One says this, the other says the exact opposite. The truth is that eventually oil prices will go up. There has been a sharp drop in investment in new projects. Still, right now we have no idea where oil will be going. You experts have to write something to get paid, but you do not have any more of an idea where prices are going than my customers do. Also, my customers are the major oil companies, OEM's, and steel companies. I personally believe that for the next two years it will stay in the high $40.00 to low $50.00 range. To my Saudi friends, good luck with that Aramco stock offering. You are going to need it.

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