Harvey's Destruction Demonstrates Value of Strategic Petroleum Reserve

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Harvey's Destruction Demonstrates Value of Strategic Petroleum Reserve

Oil prices have dropped sharply this week even though FBE Energy estimates that the storm knocked out 780,000 barrels of Gulf of Mexico and Texas shale production.

Tropical Storm Harvey is estimated to have slashed U.S. refining capacity by around 20%, with most plants in the Houston area remaining closed.

After hurricanes Katrina and Rita hit the US 12 years ago, the International Energy Agency released emergency petroleum reserves.

Hurricane Harvey has triggered a unique phenomenon in the USA oil and gas industry.

But overall, crude prices have ailed since Harvey hit, as closed refineries have dried up demand for oil.

The benchmark West Texas Intermediate for delivery in October lost $1.30 Monday to close at $46.57, with the market fearing that demand for crude will be hit by the storm. Others said higher gasoline prices might prompt operational refineries to delay typical September seasonal maintenance.

The U.S. Energy Department announced the emergency release of 500,000 barrels of oil from the Strategic Petroleum Reserve that will be delivered to a refinery in Louisiana to help boost gasoline supplies.

The national price for a gallon of unleaded gasoline averaged $2.45 on Thursday, the highest recorded rate of the year, according to the American Automobile Association (AAA).

In refined products, price movement was more dramatic and gains increased after sources on Wednesday said Total's Port Arthur, Texas, refinery had been shut by a power outage resulting from the storm. On the New York Mercantile Exchange, contracts for October delivery have spiked 2.5% in recent trading to $47.11 a barrel. Prices in the region have risen as supply falls due to refinery closures. Operations were stable at the largest USA crude refinery, Motiva Enterprises' 603,000-bpd Port Arthur plant, the company said.

Flooding is "now the greatest threat" to U.S. Gulf Coast energy infrastructure, Goldman Sachs Group Inc. analysts including Damien Courvalin said in an emailed report on Wednesday.

The price of Nymex reformulated gasoline blendstock for September-the benchmark contract-was up almost 14%, at $2.1470 a gallon, following eight days of gains that have driven prices up to two-year highs.

While the refineries were shut off as a precaution for the storm, flood damage has occurred at some facilities. The closure of so many USA refineries has resulted in a slump in demand for the most important feedstock for the petroleum industry. A ship carrying 35,000 tons of gasoline would have cost the equivalent of US$3.47 a barrel to charter earlier this month, excluding insurance and some other costs. The company said Thursday that it can't provide any timeline for a restart, raising further concerns over a potential shortage of gasoline supplies.

Ports and oil terminals in the Greater Houston area also remain closed, and although ports in Louisiana are now open, disruption is expected late on Tuesday and Wednesday.

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