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 is expected to make landfall as a Category 2 hurricane along the U.S. Gulf Coast near the Florida and Alabama border on Friday night, according to AccuWeather.
Isaias has already made history as the latest hurricane on record to form during the Atlantic hurricane season, which runs from June 1 through Nov. 30.
The storm comes at a critical time for the global oil industry. Crude-oil (CL00) (BRN00) transits through the Strait of Hormuz have been trying to recover even as the conflict in the Middle East has stretched into an eighth month, while 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 localized rainfall amounts of up to 15 inches are possible through the weekend, 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, COO of Earth Science Associates, a provider of data and analytic tools to companies that produce oil and gas in the Gulf of Mexico.
The projected path is on the eastern side of the Gulf. The good news for the oil-and-gas industry is that most of its facilities - both onshore and offshore - are located further west, said Molchanov. "The caveat here is that hurricane trajectories are subject to change," he added.
Based on the latest projections, the coastlines of Alabama and Mississippi could be the most affected, Molchanov noted. Alabama has 142,000 barrels per day of refining capacity and Mississippi has 394,000 barrels per day, while Louisiana has far more at 3 million barrels per day - though the hurricane is forecast to cross over only a portion of Louisiana's capacity.
Refinery flooding would be the top risk because repairing damage from that could take months, Molchanov said. With no flooding, refineries could be expected to resume operations within weeks, with roughly the same recovery timetable for offshore oil platforms, he said.
By late Friday morning, 72.7% of the rigs in the Gulf of Mexico, which the U.S. government now calls the Gulf of America, had been evacuated - with 71.5% 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 nonevent," 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. Diesel cost an average of $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," he added.
-Myra P. Saefong