Hurricane Katrina wreaks havoc on U.S. oil facilities

- By Kevin Hazel, September 7, 2005

The devastation wrought by Hurricane Katrina is likely to have a significant impact on the tanker market over the next few months.  To some extent, the situation appears similar to that which was seen nearly a year ago in the aftermath of Hurricane Ivan, which knocked out about 0.5 mbd of  U.S. production for a period of one month.  Although production was restored rather quickly in the following months, this still led to a dramatic spike in crude tanker rates as OPEC production rose sharply in response.

So far, Katrina has had an even greater negative impact on U.S. oil production, with nearly 0.9 mbd, or 60% of total Gulf of Mexico output, still shut-in as of September 6.  In comparison, 8 days after Hurricane Ivan, only 30% of output was still shut-in.  But there are two very big differences between recent events and those of a year ago.  First, refineries have also taken a big hit this time around, with at least four refineries, having total throughput capacity of about 1 mbd, still shut down as of yesterday.  Second, the International Energy Agency has called for a drawdown of strategic stocks to ameliorate the current situation.  The U.S. has announced a 1 mbd drawdown in its strategic crude stocks over the coming month, while Europe and Japan are expected to draw down strategic stocks, of mostly refined products, by as much as 1 mbd over the same period.

So, what does this mean for the tanker market?  In the very near-term, meaning the next month or two, we expect product tankers to benefit from increased trade in refined products.  With Europe sending additional gasoline supplies to the U.S., rates for a transatlantic voyage have already jumped from $20,000 per day to $35,000 per day over the past two weeks, and we expect most product tanker rates to remain very high for the next two months.  The temporary waiver of the Jones Act could also help boost the demand for product tankers.

Meanwhile, the near-term crude tanker outlook is more difficult to forecast.  Although the reduction in U.S. crude production should eventually lead to increased crude imports, the lack of refinery capacity and the drawdown in strategic reserves is likely to limit the need for additional crude imports during the next month or two, and thus we do not expect an imminent surge in crude tanker rates.  In fact, crude tanker rates could remain relatively weak over the coming month.

However, as U.S. refinery capacity is restored, the relative fortunes of the crude and product tanker markets are likely to change.  Specifically, we expect U.S. refinery capacity to be back to its pre-hurricane level by November, which would reduce the need for incremental product imports.  In contrast, U.S. oil production is likely to recover more slowly, based on the experience from Ivan, when 0.2 mbd of output remained shut-in even three months after the hurricane hit.  Consequently, U.S. crude imports are likely to increase significantly during the fourth quarter, and OPEC has already started to discuss plans to add another 0.5 mbd to the market.

If this scenario comes to pass, and OPEC increases production to 30.8 mbd during the fourth quarter of 2005, we would expect to see a significant jump in crude tanker rates, relative to their recent levels and to our pre-Katrina forecast.  But we do not expect to see a repeat of last year’s astronomical tanker rates, which were driven by booming global demand and a 1 mbd increase in OPEC production in the aftermath of Hurricane Ivan.  With total OPEC spare capacity estimated at just 1.5 mbd, such a sharp rise in OPEC output seems unlikely, though as shown in the table below, it would lead to a near-repeat of last year’s booming freight rates.

As for the longer-term outlook, we will address this in more detail in our upcoming monthly and quarterly reports.  However, our initial expectation is that the tanker market will be helped modestly in 2006 by the need to replenish strategic reserves, as well as by the continued shortfall in U.S. domestic production that is likely to result from Katrina.  But this more positive outlook is threatened to some extent by the prospect of higher oil prices and slower economic growth, so the situation will have to be examined more closely.

With new information becoming available daily, we recommend that clients wishing to follow the situation go to the U.S. Dept. of Energy website (www.eia.doe.gov) and the Minerals Management Service site (www.mms.gov).

And finally, it is worth noting that the dry bulk market is likely to be affected as well by the fallout from Hurricane Katrina, though in a much more modest way.  Since New Orleans is a major port for the shipment of U.S. grain exports, some disruption in trade is likely in the near-term.  This could push supplies to other ports, and some grain shipments may end up being delayed for a month or two, putting slight downward pressure on rates temporarily.  But trade is likely to return to normal during the fourth quarter, with the hurricane’s impact on dry bulk freight rates likely to be minimal.