Oil and Gas Industry Devastated By Harvey

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Hurricane Harvey saw a surge in gas prices after 14 percent of U.S. refining capacity was shut down following the flooding and devastating impacts of this huge storm.

Harvey curbed the demand for crude and raised the risk of having fuel shortages. Reuters reported that almost 4.4 million barrels refining capacity in the U.S. was shut down. This represents close to a quarter of the U.S. total refining capacity. It is estimated that it will take nearly a week or more for restarting the plants, even under the best of conditions.

As the refineries began restructuring, the very few large and more competitive players were expanding, taking a larger market share and controlling the prices.

Due to the flooding and the damage from the hurricane the Port Arthur refinery shut down, pushing gasoline futures up 5.9 percent while bringing down Brent’s oil prices to $50.86 per barrel and U.S. crude oil to $45.96 a barrel.

In over two years, the spread between U.S. and Brent crude was at its widest following the storm prior to settling at $4.90. For the refined products, the gains intensified in prices after it was reported that the Port Arthur had shut down. The continued suspension of refinery operations will result in serious financial impacts to investors. Although the refineries are being restarted after the storm, a full recovery might be realized in the coming weeks.

Harvey is the most powerful hurricane to strike Texas in over 50 years, and has caused the death of at least 22 people. The hurricane was projected to drop an additional 3-6 inches of rainfall, with a storm surging up to 4 feet along the Gulf Coast western part of Louisiana.

The increase in oil prices in the US due to the flooding and storms affects the oil refineries in the region and this can largely impact investor confidence. This has lead to a fear of crude oil shortage in the US leading to a continuous increase of oil and other oil products. CMC Markets, a UK-based financial derivative company, increased the number of people willing to invest in financial derivatives such as crude oil futures to manage the risk of fluctuating prices of the commodity.

Gasoline prices have also increased by 3.2% at $1.8391 requiring proper financial management to handle the fluctuations in the market. Potential shortage in oil refineries has to lead to a high increase in the oil products requiring hedging using financial derivatives.