Supply disruptions during the Atlantic hurricane season usually end up being a blip. This year could be very different.
Hurricane Isaias is forecast to make landfall late Friday near the Florida and Alabama border.
The oil shock created by the Iran war is about to face its first hurricane of the Atlantic storm season, which is set to hit Friday near the heart of the U.S. oil production and refining industry.
"At a time of unprecedented oil supply disruption for geopolitical reasons, Hurricane Isaias offers a reminder that weather risk hasn't disappeared," said Pavel Molchanov, investment-strategy analyst at Raymond James.
Hurricane Isaias was expected to make landfall as a Category 2 hurricane along the U.S. Gulf Coast Friday night near the Florida and Alabama border, according to AccuWeather.
Isaias already made history as the latest hurricane on record to form during the Atlantic hurricane season, which runs from June 1 through Nov. 30.
It comes at a critical time for the global oil industry. Crude-oil transits through the Strait of Hormuz have been trying to recover even as the conflict in the Middle East has stretched into an eight month, and U.S. retail prices for refined products, including gasoline and diesel have pulled back from their highs of the year.
"If this hurricane ends up causing refinery flooding, it would exacerbate an already tight market for refined products, further pushing up prices at the pump," Molchanov told MarketWatch.
The National Hurricane Center warned that dry areas near the Gulf Coast could be flooded by rising waters and that through the weekend, localized rainfall amounts of up to 15 inches are possible, particularly in parts of the Florida Panhandle and Big Bend.
As of Friday morning, Hurricane Isaias has the potential to disrupt about 6.7 million barrels of oil production, according to Tony Dupont, chief operating officer at Earth Science Associates, a provider of data and analytic tools to the companies that produce oil and gas in the Gulf of America.
The projected path is on the eastern side of the Gulf. The good news for the oil and gas industry is that most of their facilities - both onshore and offshore - are further west, said Molchanov. "The caveat here is that hurricane trajectories are subject to change."
Based on the latest projections, the coastlines of Alabama and Mississippi could be the most affected, he said. Alabama has 142,000 barrels per day of refining capacity and Mississippi has 394,000 barrels per day. Louisiana has far more, at 3 million barrels per day, he said, though the hurricane is forecast to cross over only a portion of that.
Refining flooding would be the top risk because repairing damage from that could take months, said Molchanov. With no flooding, refineries could be expected to resume operations within weeks, roughly the same recovery timetable for offshore oil production platforms, he said.
By late Thursday morning, 45.5% of the rigs in the Gulf of America had been evacuated, with nearly 63% of the region's oil production temporarily suspended, according to the Marine Minerals Administration.
"In a normal year, a precautionary shutdown of production and refining assets is basically a non event," said Rob Barnett, global head of commodity research and senior energy analyst at Bloomberg Intelligence, But this year it's a "stress test given how tight markets are for diesel, jet fuel and other refined products."
Average U.S. retail prices for regular gasoline were at $4.372 a gallon Friday, down from $4.225 a month ago, while diesel cost $6.279 a gallon, after climbing to a record high at $6.528 on Sept. 22, according to AAA.
It has been an exceptionally quiet Atlantic hurricane season, broadly consistent with a strong El Niño, said Barnett, referring to a climate pattern that can lead to warmer weather. That has been a "blessing for energy markets, given the Strait of Hormuz disruptions and other dislocations in the global market."
-Myra P. Saefong