Quiet Start To US Hurricane Season Takes Heat Out Of Oil Prices: Kemp

Quiet Start To US Hurricane Season Takes Heat Out Of Oil Prices: Kemp

By John Kemp, Senior Market Analyst at Reuters

The Atlantic hurricane season is nearing its halfway point and so far no hurricanes have made landfall on the coast of the United States, contributing to the recent downward pressure on oil and fuel prices.

The Atlantic season lasts from June 1 to Nov. 30, with half of the storms usually occurring before Sept. 12, based on records compiled by the U.S. National Oceanic and Atmospheric Administration (NOAA).

On average, four hurricanes made landfall somewhere on the Atlantic or Gulf Coasts of the United States by Sept. 12 each year between 1851 and 2021 (“Hurricane database”, HURDAT2, NOAA). 

But this year the start of the hurricane season has been the quietest for 25 years. There were no Atlantic hurricanes in the month of August for the first time since 1997 and only the third time since 1950 (“Quiet start to hurricane season“, Wall Street Journal, Sept. 7).

No hurricanes have made landfall on the Atlantic or Gulf Coasts so far in 2022, ensuring crude and fuel production has continued uninterrupted and helping ease concerns about the low level of inventories.

Hurricanes tracking through the oilfields of the western Gulf or making landfall near the refining centres of Texas and Louisiana have the potential to interrupt offshore crude production and onshore gasoline and diesel refining. Severe storms in these areas often create a short-term spike in crude and fuel prices and traders anticipate potential moves by bidding up futures contracts for deliveries in September and October.

In May, NOAA forecast this year would see an above-average number of hurricanes and tropical storms, based in part on La Niña conditions in the Pacific (“NOAA predicts above-normal Atlantic hurricane season”, May 24).  The agency reiterated this forecast as recently as the start of August (“NOAA still expects above-normal Atlantic hurricane season”, Aug. 4).

The possibility of hurricanes disrupting oilfield output or gasoline and diesel refining was especially worrisome given sanctions on Russia’s oil and diesel exports and the low level of oil inventories especially diesel stocks.

Hurricane risk likely contributed to rapidly rising prices for crude and abnormally high refining margins for gasoline and especially diesel through the end of July.

But the forecast storms have not materialized.

Falling Prices

Half the hurricane season still lies ahead so there is plenty of time for significant damage to offshore platforms and onshore refineries.  In statistical terms, however, the risk is now much lower than it seemed between June and early August, which has likely taken some of the heat out of crude and fuel prices.

Prices for gasoline, in particular, have been falling much faster than for crude in recent weeks as the risks to the refining system have dropped.

Gasoline pump prices, including taxes, were at a premium of $1.58 per gallon ($66 per barrel) to Brent crude on Sept. 5 compared with $2.35 per gallon ($99 per barrel) in the middle of June.

The gasoline premium has fallen close to its lowest levels since Russia invaded Ukraine in late February and is broadly similar to the premium a year ago, as some hurricane risk has evaporated. Premiums have narrowed even though gasoline inventories at the end of August were 14 million barrels (6%) below the pre-pandemic five-year average for 2015-2019.

Diesel prices have remained firmer, in part because inventories remain much lower and manufacturing and freight activity has proved more resilient than expected a couple of months ago.

Distillate fuel oil inventories near the end of August were 32 million barrels (22%) below the pre-pandemic five-year seasonal average.

As a result, on-road diesel prices were at a premium of $2.80 per gallon ($118 per barrel) to Brent on Sept. 5 which was little changed from $3.10 per gallon ($130 per barrel) in the middle of June.

But it is likely that diesel prices would have moved even higher if the hurricane season had been much more active so far.

The quiet start to the season has removed one source of production risk while high prices and a slowing economy have started to dampen consumption.

The combined impact has been a significant reduction in the risk of fuel shortages with prices retreating from their mid-year highs.

Related column: – Hurricane season menaces already stretched U.S. diesel supply (Reuters, May 26)

Tyler Durden
Fri, 09/09/2022 – 12:10

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