Crude Falls Ahead of Irma: Major Devastation Expected But No Direct Threat to Oil

Friday September 8, 2017

The advent of Hurricane Irma influenced crude prices Friday after a week of tentative growth in the wake of Hurricane Harvey and the quicker than expected recovery of refinery operations: West Texas Intermediate settled down $1.61 at $47.48, while Brent remained unchanged at $53.78 - the result, say experts, of  Saudi Arabia saying will cut crude oil allocations to its customers worldwide in October by 350,000 barrels per day (bpd).

On the eve of Irma's arrival in Florida and catastrophic wind speeds of 260-295 kilometres per hour expected, the question is: to what extent will the storm impact the energy industry?

Andy Lipow, president of Lipow Oil Associates, told CNBC that while Irma is not a direct threat to oil production or refining facilities, it is still cause for concern: "the biggest issue we face is the storage terminal and distribution system in Florida, which consumes about 500,000 barrels per day of gasoline and receives about 90 percent of it by vessel."

He added that if the hurricane drifts to the west side of the state, "then we start impacting natural gas and oil production off the coasts of Alabama and Louisiana."

However, he concluded the storm is too far east to have any effect on recovering operations in Texas; plus, the chaos in the gulf coast "is good for refiners worldwide."

But even if Irma doesn't disrupt U.S. operations too severely, that doesn't mean there aren't other issues to worry about: it seems analysts are now concerned about the quicker than expected growth of the Liquefied Natural Gas (LNG) industry, with supplies said to be on course to increase by 50 percent between 2014 and 2021.

Essentially, the production surge has caused gas prices in Europe and Asia to fall by over 40 percent, thus rendering returns on investment in new LNG projects below the level anticipated when the projects were approved.

The International Energy Agency in its latest annual outlook stated, "While gas is set to perform much better than other fossil fuels over the coming decades, some of the pillars on which a bright future for gas have been constructed look a little less solid than they have in the past."

To which Andrzej Ancygier, an analyst at Climate Analytics, added, "This over-investment in natural gas infrastructure is likely to lead to either emissions overshooting the Paris [emission] goals, or a large number of stranded assets as the shift to cheaper renewables takes place."

The devastation caused by Hurricane Harvey, its initial impact on Gulf Coast refining and the consequent impact on world markets caused Ed Morse, head of commodities research at Citigroup Inc. to note that "the U.S. has emerged as a global energy bug."