Storm could become first hurricane of season and is already shutting down energy operations

Stock Market

The U.S. energy industry has halted about a third of Gulf of Mexico oil production and expects more disruptions, as the industry braces for the first hurricane of the year.

The approaching storm, which was still forming over the Gulf Wednesday, was expected to head into the Louisiana coast by Saturday, dumping a large amount of rain.

Oil prices jumped Wednesday by 4.5%, per barrel, on concerns the storm would disrupt oil production and threaten flooding around refineries in the area. Gasoline futures were also higher by about 4%, reaching $2 per gallon.

The U.S. Energy Information Administration said Wednesday that U.S. crude stocks fell by 9.5 million barrels last week, triple what was expected by the market. At the same time, the oil industry is shutting in production and major producers evacuated rigs in the Gulf of Mexico, ahead of the approaching storm.

The National Hurricane Center is predicting that the storm will develop over the Gulf of Mexico and hit the coast of Louisiana by Saturday. The storm, to be named Barry, would be the first hurricane of the season.

Reuters reported that production in the gulf was cut by 602,715 barrels a day, about a third of of gulf output, according to the Bureau of Safety and Environmental Enforcement. Natural gas production was reduced by nearly 18%. 

The U.S. Coast Guard anticipates issuing potential water way restrictions on the Mississippi River within the next two days. That could limit the movement of tankers to and from refining areas.

A U.S. Coast Guard official said, so far “we have not issued any water way restrictions. We are anticipating that in the next 24 to 48 hours.” The spokesperson said depending on the expectations for wind and rain, the coast guard could act to restrict tanker traffic on the Mississippi River. The Coast Guard could also limit speed and direction in the shipping channel.

“The forecasts are showing a significant amount of rain and the potential for flooding along the Mississippi River is a concern in the refining and oil industry,” said Andrew Lipow, president of Lipow Oil Associates. “The market has been moving up on all the issues related to the storm. A number of producers have been evacuating their platforms in the Gulf of Mexico, and curbing production.”

Chevron Corp, Royal Dutch Shell, BP, Anadarko Petroleum and BHP Group were evacuating staff from 15 offshore platforms.

“From the track, it looks like the landfall is in the Lake Charles area. The concern is on the dirty side, where we get a lot of rainfall, can occur in the New Orleans and Baton Rouge area. We could see a storm surge that backs water into the Mississippi which is already very high,” said Lipow. Lipow said there are three major refineries in Lake Charles and about 10 in the New Orleans, Baton Rouge area.

“I don’t think it’s a big threat,” said Brian Lovern, meteorologist at Bespoke Weather Services. “Most likely if it does get there, we’re talking about a category one storm. I don’t want to diminish any hurricane. It’s still a hurricane. Those hurricane force winds would be in a very small area, right around the center of the storm. In the grand scheme of things, the big story out of this is it’s going to be a rain maker more than anything else.”

Lovern said it appears that much of the state of Louisiana will get six to 12 inches of rain. There are some spots that could get as much as 18 inches.

“It’s not going to move quickly, but it’s not like Hurricane Harvey that hit Houston and didn’t move for five days,” he said.

The biggest impact for the energy industry could be shut downs.

“If anything else, for precautionary measures, they’re going to shut down everything in the Gulf. It will impact operations in that regard,” said Lovern. “It shouldn’t do a whole lot of damage that ‘s going to cause disruptions longer term. “

Gene McGillian of Tradition Energy said other factors are combining to push oil prices higher, including tensions between the U.S. and Iran and OPEC’s recent agreement with Russia to curb production.

“All the things together are starting to push the market higher again. We also haven’t seen a ratcheting up of trade issues. That is helping alleviate some of the demand concerns,” said McGillian, adding he believes the storm reaction may be overdone.

Jacob Mesel, chief fundamental natural gas analyst at Condor Alpha Asset Managment, said he expects some impact on liquified natural gas shipments. “There’s the potential for the LNG ship channels to be disrupted. Essentially, they might not be able to get LNG vessels into the Sabine Pass or Cameron for a couple of days,”  

However, Meisel said bearish factors outweigh bullish for the natural gas market. Natural gas futures were up about a half percent Wednesday.

“They’re going to try to get overall levels in and keep operations going until the storm is right over top of them. This storm is not so strong that I worry about any real damage to the LNG facilities themselves,” he said.

Meisel said a bigger factor could be demand disruption from the storm, especially if there is flooding and power outages. 

Reuters contributed to this story

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