What Does Hurricane Ida Mean For Crude Markets?

August 30, 2021

Last night, Hurricane Ida hit Louisiana square in the middle of the heart of US oil transport and refining.

While the press makes a comparison to Katrina, traders need to assess how this is likely to affect the markets. Experts anticipate that the storm will impact the area for a few more hours before authorities can start assessing the damage.

But there is quite a bit we have to prepare for.

Ida came as somewhat of a surprise. In fact, when the storm first appeared on the market radar, analysts thought it would move into Yucatan and potentially dissipate.

On Friday, though, the weather changed. And traders had just a few hours of open markets to prepare. Even then, there wasn’t much expectation that it would strengthen so fast, with initial National Hurricane Center assessments showing it as a tropical storm over Louisiana.

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Where things are going

Shell was the first company to shutter its offshore production on Friday, in anticipation of the storm’s arrival.

That means three days of lost production even before the storm. The rigs themselves wouldn’t be able to resume production until at least two days after the storm passed, or around Wednesday.

So, this adds up to five days of production loss. And that is even assuming that the situation onshore is able to receive crude.

As of Sunday night, 95% of Gulf crude was offline, and 94% of Gulf natural gas was offline. They probably won’t resume production for at least several days, if not weeks. The EIA estimates over 1.7M bbl/day of production is offline at the moment.

Initial calculations show that 12% of US refining capacity is offline, concentrated in 7 refineries. They will likely remain offline for up to 6 weeks. Moreover, some of the systems are still in effect after the winter storm that affected Texas. In turn, that could delay restarts even further.

What to look out for

Even as the storm moves north and away from New Orleans and Baton Rouge, the situation is not over.

Experts forecast the storm to drop up to 6 inches of rain throughout most of the state of Mississippi. The storm’s projected trajectory has it hugging the Mississippi River as far north as Tennessee, where it will arrive by early Tuesday. All of that water could flow down the river into the New Orleans area, threatening the levees.

Presumably, since Katrina, there have been improvements in the levee system. Especially since the system was a key failure that led to the major disaster 16 years ago.

This is the first major test since then, so we want to monitor how the levees will hold up for the next 48 hours.

And beyond

The next major event for crude is on Wednesday, with the OPEC meeting.

Despite the (likely temporary) drop in production because of the storm, economists anticipate the cartel to seriously discuss whether they will raise production, as they initially agreed.

So far, the markets appear to be shrugging off the hurricane’s effect. Specifically, WTI is trading down over 0,5% at the start of the session.

However, during daylight, we will likely get a much better assessment of the real damage from the storm. We can expect a series of updates throughout the US session, as producers estimate the hurricane’s impact and when they can get production back online.

By Orbex