It should go without saying that the events in Houston and the surrounding area this week have been tragic in human terms. Many lives have been lost and many more devastated by the floods that resulted from Hurricane Harvey. It may seem trite and somewhat heartless to talk about the market implications of an event like that, but once we have donated to relief causes and said our prayers we can only return to our normal lives, and mine involves assessing how events shape markets.
In those terms, the reaction to the storm has been interesting. Given the Houston area’s prominent position in the oil industry, many were surprised by crude’s immediate reaction, a big drop in price. If you think it through, though, it made perfect sense. There were some closures amongst the rigs in the Gulf of Mexico, but those represented only a small fraction of U.S. crude production, which was in surplus before the closures. Oil prices have since recovered some as the extent of rig closures became known, but are still below the levels before the storm.
The biggest effect, however was not on crude production but on refiners. I was recently in the Houston area and it seemed that wherever I went I was always no more than a stone’s throw from a refinery. Little wonder then that by some estimates around twenty percent of America’s refining capacity has been lost this week.
That results in a short-term drop in demand for crude, hence the fall in price, and a…