Diesel Fuel Price Impacts of Hurricane Season

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Among the myriad of factors that influence diesel prices and the budgets of countless transportation professionals, weather often flies under the radar. Though extreme weather events gain national attention, they are often less emphasized in transportation news while taxes, geopolitics, and policy decisions domestically and internationally are prevalent.

But the weather can impact diesel fuel prices in a big way. Particularly, hurricanes can have notable effects on price due to the severity of the storms by nature. The effects of hurricanes are further amplified when the US Gulf Coast – arguably one of the world’s most vital energy hubs – is in clear line of sight. The Atlantic hurricane season officially begins at the beginning of June and extends through November, leaving energy fundamentals sensitive to weather catastrophe in coastal states and their dependents for roughly half a calendar year.

Hidden in the chaos of hurricanes lies crude oil and refined product dynamics that both, directly and indirectly, feel the brunt of these storms. Below is a list of ways that diesel dynamics are impacted by hurricane season.

Infrastructure Damage and Supply/Demand Disruptions

States surrounding the Gulf of Mexico and the Atlantic Coast house much of the US’ upstream and downstream energy infrastructure—oil wells, pipelines, refineries, storage tanks and oil racks/terminals. As large-scale storms wreak havoc on communities along the coast, refineries and pipelines are also damaged, creating disruptions in the supply/demand balance. This results in fuel price turbulence that can last several months.

As the prevalence and intensity of hurricanes in the United States have continuously worsened over time, an imminent level of risk should be expected over regional diesel prices and shippers’ transportation fuel spend during hurricane season.

Upstream Oil Production Disruptions

Markets tend to respond hastily when hurricanes first arise near energy infrastructure centers in the US. One the demand side of the equation assumed risk associated with a storm drives up both demand and prices. People know that severe weather is approaching, and consumers rush to the pumps to stock up on both gasoline and diesel before they lose temporary access.

Beyond the frenzy to fill, the supply side of the equation is at almost greater risk of disrupting prices. Offshore crude oil production in the Gulf of Mexico is vulnerable to powerful storm damage jeopardizing about 2.0 million barrels of oil per day, or 16 percent of total US production.

Since Hurricane Katrina in 2005, one of the most devastating hurricanes in US history, the energy market has grown more vulnerable. Considerable growth in domestic refining capacity, aggregate oil production, and crude exports have solidified the US as one of the world’s leading energy moguls and a linchpin to international energy flows. More specifically, the US was amid a crude oil export ban when Katrina hit Louisiana and surrounding states 14 years ago. This made the oil side of the discussion fairly confined to the US and its resulting supply impact.

Since then, US oil exports have topped approximately 3.0 million barrels per day, with noticeable expansions in shale and offshore production facilitating growth forecasts that will aid the US in becoming a sustainable net exporter of energy products within the next year.

In total, US-destined hurricanes have energy implications far and beyond refined products domestically. The chart above highlights oil production declines as a result of major hurricanes barreling through the Gulf of Mexico and its deep-water oil platforms. Offshore oil disruptions are typically short-lived due to the abrupt nature of hurricanes altogether, but the offline supply can range widely from a noninfluential market blip to one that will undoubtedly move the price needle for diesel prices and global energy commodities, alike.

Downstream Refinery Dynamics

Oil refineries rest at the focal point of energy discussions before, during, and after a hurricane makes landfall. The concentration of US refinery capacity in the US Gulf Coast region, especially in Southeastern Texas and Southern Louisiana, makes this region a relatively easy target for a hurricane’s path, with outages impacting the supply and demand balance and price environment across the US landmass.

The map below shows the dispersion of the US refining landscape, revealing the significance of the Gulf Coast refining hub that ultimately accounts for nearly 50 percent of total US refined product output. What is not so clear is the refined products pipeline network that stems from the Gulf Coast refining center. This is where the regional nature of supply and price disruptions broadens to encompass the entire US, again reinforcing the interdependent nature of the nation’s downstream energy supply chain.

This was evident during both Hurricane Harvey and Irma in late 2017, in which the storm’s aftermath led to closure of the Colonial Pipeline at its Gulf Coast origination, forcing many East Coast states to source their petroleum products elsewhere until operations resumed.

This highly complex refinery nucleus of the US is critical to overarching energy dynamics. When outages occur – both planned and unplanned – a knock-on supply effect ensues that leads to a decrease in refinery utilization rates and dwindling inventories. Keep in mind these headwinds are supplemented by the ever-changing market conditions occurring behind the scenes, elevating the risk of a supply-induced price premium for an undisclosed period.

The chart above shows how hurricanes Harvey and Irma in 2017, and Michael and Florence in 2018, resulted in a downturn in refinery utilization in PADD 3 (US Gulf Coast) and its natural draw on total US refining operations. Collectively, this led to sudden inventory de-stocking that created diesel price pressure across the country. Seasonality, refinery maintenance periods, and encompassing economics regularly impact refinery operations, their run rates, and the resulting inventory levels under normal circumstances, but hurricanes historically lead to a downward shift in nearly all refining variables.

What is the ultimate result for diesel prices?

Upward fuel price movement during a hurricane’s presence is nearly a guarantee. The intertwined nature of the US’ crude oil industry, refining complexes, and storage and distribution networks creates a chain reaction up to the station level while hurricanes linger. An important variable often hidden in the negative headlines of hurricanes, however, is refined products demand. As storms approach, shippers and consumers alike limit their use and need for products as they brace for the effects of the event. Lower demand helps offset a portion of the upward price pressure experienced during the storm due to infrastructure damage. The net effect, however, almost always trends toward higher prices due the foreseen disruption and its price implications altogether.

This is visible in the chart below, which represents the diesel price change from the time a hurricane makes landfall to 30 days after. The four most severe hurricanes of the past two years are used to show the wide array of price scenarios that can unfold. In general, the upward price shock is unavoidable, albeit the most noticeable spike occurs in the first one to two weeks after making landfall. Hurricanes Harvey and Michael were exceptions due to the storms’ magnitudes, but price volatility was experienced regardless.

The trajectory of the four price curves shown above were partly driven by global market conditions separately, meaning the longevity of the price behavior was not necessarily solely tied to hurricanes. However, a clear separation between global market tendencies and hurricane-driven price behavior exists, which can accurately be accounted for by shippers using a market-based fuel management strategy like Breakthrough Fuel Recovery.

 

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