By By Nick Cunningham
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.
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.
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.