Record heat in US summer, hurricanes could shake up fuel prices as oil refineries sweat

By Shariq Khan and Nicole Jao

NEW YORK (Reuters) – A double whammy of record heat and hurricanes is likely to test the resilience of U.S. refineries in the coming weeks, raising the risk of extremely volatile fuel prices in the middle of the peak travel season, analysts said.

The Atlantic hurricane season, from June to November, is an annual threat to U.S. refineries. Half of the country’s more than 18 million barrels per day refining capacity is located along the Gulf Coast, which is highly susceptible to tropical storms. The US is the largest fuel market in the world.

Refineries this year may have to prepare for more storms than normal. Government forecasters expect up to seven major hurricanes in the coming months, double the annual average of three major Atlantic hurricanes, with wind speeds exceeding 111 miles per hour.

Citgo Petroleum Corp was cutting output from its 165,000-barrel-per-day refinery in Corpus Christi on Saturday and plans to operate the facility at a minimum as Tropical Storm Beryl moves along the Texas coast, sources said.

Texas’ largest ports have also closed operations and ship traffic in preparation for Beryl, which is expected to revert to a hurricane before hitting the area Monday morning.

The intensity and timing of Beryl, which at one point became the first Category 5 hurricane on record, signal an active and disruptive season ahead, said Neil Crosby, crude oil market analyst at Sparta Commodities.

“Hurricanes remain the biggest unpredictable driver of gasoline prices,” said GasBuddy analyst Patrick De Haan. “There is no better reminder of this than Beryl,” he said.

Evacuation orders ahead of storms could build up inventories and increase demand for fuel, causing prices of gasoline, diesel and other refined products to rise, De Haan said.

If a major storm hits the Gulf Coast refining system, it could remove up to a million barrels per day of fuel supply and lead to prolonged outages or even permanent shutdowns, according to the U.S. Energy Information Administration ( EIA).

Hurricanes heading toward the Gulf Coast could also eliminate a similar amount of crude oil supply, with the offshore Gulf of Mexico region hosting about 14% of U.S. oil production.

In 2021, US oil and gas companies suspended oil production of more than 1.7 million barrels following Hurricane Ida.

Disruptions of about 1.5 million bpd in crude oil production and refining capacity could cause gasoline prices to rise by 25 to 30 cents, according to the EIA.

WARMER TEMPERATURES

In addition to hurricanes, refineries are expected to face more problems related to scorching heat this year.

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The latest US monthly temperature forecasts predict above-average temperatures across much of the US in July, typically the hottest month.

Excessive temperatures have outsized effects on commodity supply chains, including oil and fuel, JPMorgan analysts wrote last month.

Most refineries are designed to operate between 32 and 95 degrees Fahrenheit. Triple-digit temperatures can lead to equipment malfunction and reduced refining capacity.

Extreme heat last year led to a 500,000 bpd reduction in Gulf Coast refined product production, JPM analysts wrote.

Similar effects are being felt this year. Unit problems reported by Phillips 66 at its Wood River refinery in Illinois last month were likely due to heat waves, according to Kloza and other industry experts.

SILVER LINING

A robust maintenance season earlier this year allowed U.S. refineries to undertake major upgrades and perform detailed maintenance that had been repeatedly delayed due to increased post-pandemic demand and supply disruptions.

That should, in theory, make refineries better prepared for hurricane season, said Alex Hodes, a petroleum analyst at brokerage StoneX.

Sluggish demand in recent months has also helped refineries build fuel reserves, which should act as buffers in the event of outages.

U.S. gasoline inventories have risen by about 4 million barrels since the beginning of April to close to 231.7 million barrels as of June 28, in line with the seasonal average over the past five years, excluding 2020.

Distillate stocks, including diesel and heating oil, have grown by 3.7 million barrels since the beginning of April and stood at 119.7 million barrels as of June 28, slightly below the historical average excluding 2020, when Stocks were sharply lifted by COVID-related demand destruction.

“There’s not a lot of room for error,” said Tom Kloza, head of energy analysis at the Oil Price Information Service. “I’m waiting to see what happens.”

(Reporting by Shariq Khan and Nicole Jao in New York; Editing by Liz Hampton, David Gregorio and Sherry Jacob-Phillips)