Oil production in the Gulf of Mexico (GoM) has been sliced by almost one third as the season’s first tropical system is expected to make landfall as a hurricane later this week. A tornado warning and flash flood emergency have been announced in the New Orleans area due to the storm system, which could become a Category 1 hurricane. The National Hurricane Center expects Tropical Storm Barry to form in the GoM today and hit Louisiana by Saturday.
According to the U.S. Energy Information Administration ("EIA"), the GoM is responsible for 17% of domestic crude output and 5% of natural gas output daily. The onshore Gulf Coast is also home to major refining facilities.
Oil Market Prepares for Potential Supply Disruptions
Per the Bureau of Safety and Environmental Enforcement, drillers in the region have cut oil production by 602,715 barrels per day (BPD) in advance of the storm. Moreover, 18% of natural gas production, amounting to 496 million cubic feet per day, has been paused. Around 15 platforms and four non-dynamically-positioned rigs have been evacuated. Also, three dynamically-positioned rigs have been removed from the storm’s expected path. Operations in the refineries will change, depending on the level of rainfall.
The largest publicly-traded energy company, Exxon Mobil Corporation XOM has a significant Houston footprint. It has evacuated non-essential personnel from three platforms in the GoM and is prepared to clear the rest, as and when needed. However, the Zacks Rank #3 (Hold) company expects little impact on production and normalized operations of its Gulf Coast refineries. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Integrated energy major Royal Dutch Shell plc RDS.A commenced evacuation process of non-essential personnel from seven eastern assets in the GoM. Chevron Corporation’s CVX evacuation process is underway, with five platforms in the region already being shut. BP p.l.c. BP and Anadarko Petroleum Corporation APC, among other companies, have also started the evacuation process.
Crude Breaks Past $60 Per Barrel
Notably, the anticipation of output cut due to the storm follows the EIA’s report of a huge 9.5 million-barrel decline in crude oil inventories for the first week of this month. The decline in inventories and concerns over oil production outage helped oil prices to increase 4.5% on Wednesday. As a result, WTI Crude benchmark crossed the $60 per barrel mark for the first time since May. Gasoline futures also jumped around 4%, touching the $2 per gallon mark.
What Lies Ahead
The current predictions regarding the storm are not expected to significantly affect the region’s major producers. However, once a company evacuates offshore sites, it has to go through damage assessments and take several other measures before resuming full production, which in this case is not expected to take much longer. The refineries in the coastal regions can get affected if heavy rain brings devastating floods. As such, all eyes are on the news to see the movement of the storm. Per Bloomberg, the storm can immediately affect 250,000 BPD of production, which can lead up to a disruption of 950,000 BPD of output, if the situation in the region deteriorates. This amount is significant, given the fact that GoM currently produces around 2 million BPD.
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