Hurricane Harvey Forces Closure of Largest US Oil Refinery

The devastation wrought by Hurricane Harvey and its unprecedented flooding has forced several oil refineries to partially or completely close, including America’s largest. Harvey’s ferocious winds and rain forced the Motiva refinery in Port Arthur to close. The plant has the capacity for 603,000 barrels/day. According to the Wall Street Journal the refinery began closing operations at about 5am central time on Wednesday “in response to increasing local flood conditions.” The giant Saudi Arabian oil company Saudi Aramco is the owner of Motiva. Production of oil had already slowed to 60% of capacity on Tuesday.

As of Wednesday morning, about 18 refineries were at least partly closed in Texas, including those located at Port Arthur in Houston.

“The largest impact to energy markets is severe flooding, which has resulted in the closure or part-closure of nearly 25% of the United States’ refinery capacity,” analysts wrote.
“As Harvey heads inland once again, we note a number of refineries in its current trajectory will be under threat,” they added. “This could close up to another 824,000 barrels per day (b/d) of capacity, giving an additional lift to fuel prices, while further depressing crude.”

The hurricane has had more of an impact on refining than on production, which has caused a strange fluctuation in oil prices compared to gasoline prices, which have gone up compared to oil.

Usually oil prices climb in response to extreme weather that hits areas with high concentrations of oil businesses. But prices of oil have fallen recently: West Texas Intermediate crude oil was down 1.1%, at $45.94/barrel. But US gasoline futures went up to their highest level since July 2015.

As refineries close due to damage, or workers are unable to reach their jobs; or it becomes difficult or impossible to move the gasoline out, a lack of demand for oil is created. This leads to more oil in storage, waiting to be refined, thereby forcing prices down. At the same time refiners can’t produce and distribute gasoline and other refined oil products, lowering supply and forcing prices up.

This explains why, when usually the price of oil and gas go up and down together, the unique circumstances caused by Hurricane Harvey has caused oil and gasoline prices to travel independently and in opposite directions.

James Cannon

About James Cannon

James Cannon is an experienced hedge fund analyst. He has served on the advisory boards for various different Fortune 500 companies as well as serving as an adjunct professor of finance. James Cannon has written for a variety of Financial Magazines both on and off line. Contact James at james[at]businessdistrict.com