As I write this, the Debby tropical storm has formed in the Gulf of Mexico. Although its path is still rather unclear, it's predicted to cross the producing region and is already leading to some evacuations and production shut downs.
In the past, the presence of tropical storms and hurricanes in the Gulf of Mexico was enough to spark wild speculation in natural gas (UNG) and crude (USO). For example, who can forget Katrina's effect on natural gas, sparking both a quick rally, and then fears over several months regarding supply. The effect is chronicled in the chart below.
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Debby doesn't carry nearly anything like Katrina's strength. Debby is now predicted to turn a hurricane on Wednesday. Its path should cross the producing region and lead to some (very) temporary production shut downs. The part predicted by the National Hurricane Center at this point can be seen below.
(click to enlarge)
So what's the significance of one of these storms today? What I will show is that this significance has varied over the years. Let us see where it stands today for each of three relevant sectors: Crude, natural gas and refineries.
Crude
When Katrina hit, the Gulf of Mexico represented 27-29% of the U.S. production. Furthermore, the Gulf of Mexico was a prime spot to unload imports, which the U.S. depends on. Today, due to offshore drilling bans and more recently increased production from shale prospects and wider use of better technologies onshore, this relevance is somewhat reduced. The Gulf now represents 21-22.5% of the U.S. production (see chart below) (source: EIA).
(click to enlarge)
However, 1/5 to 1/4 of the entire U.S. crude production is still a very large number, and as can be gleaned from the chart, the production from the Gulf has wild swings due to storms. This means that the Gulf can still be a powerful, if temporary, factor in oil prices.
Natural gas
There is somewhat of a surprise to be had here (see chart below). Back when Katrina hit, the Gulf of Mexico represented 18-20% of the U.S. natural gas marketed production. Today? As of the most recently available data from EIA, it represents just 6-6.8%, so it has barely a third of its former relevance. (source: EIA)
(click to enlarge)
This is a result both of continuing drops in Gulf of Mexico production, surely provoked by the offshore drilling ban, and the continuing increase in onshore production due to the shale boom.
What we can conclude from this is that any impact to be had from a storm or hurricane in the Gulf of Mexico should be a lot more muted than in the past. The traders might still be working under the sense that the Gulf has a lot of relevance, though. So there can be temporary spikes, but one would say that given the production trends, spikes motivated by storms should go away instead of persisting like they did after Katrina.
Refineries
Since Debby is not predicted to make landfall in the U.S. coastal area where most refineries are located, there's little reason to believe Debby can have a large impact, even though the Gulf coast is home to 40% of the U.S. refining capacity. The updated prediction showing Debby turning into a hurricane, however, has increased risk.
Quantification of impact on oil and natural gas
As per Bloomberg:
The U.S. Bureau of Safety and Environmental Enforcement said 7.8 percent of oil production and 8.2 percent of natural gas output in the Gulf has been halted. Anadarko (APC) shut four platforms, and BP (BP) started closing some oil and natural-gas wells. Apache Corp. (APA) and two other companies began evacuating non-essential workers from some Gulf facilities.
With natural gas from the Gulf amounting for 6.8% of the U.S. production, this means the overall impact is just 0.56% of total production, so quite irrelevant as we had expected. This should change inventory builds for one week by around 3 Bcf.
As for crude, with the Gulf representing 22.5% of the U.S. production, the overal impact is 1.76%, which although not large, is still more than three times larger than the impact on natural gas. Also, the impact might be magnified if some imports are delayed as they should.
Conclusion
As far as we can predict now, Debby's relevance should fall mainly on crude, as the Gulf of Mexico crude production is still very relevant for the overall U.S. production. The impact might be enough to put a temporary stop in crude's rapid descent. It might also contribute to a further tightening of the WTIC - Brent spread (which has already been going down recently, with the opening of the Seaway pipeline).
As for natural gas, the Gulf of Mexico has lost relevance over the years, and any impact ought to be temporary and small, especially in light of cooler weather predicted for next week. Still, if some impact happens, it will favor producers with no Gulf of Mexico exposure, such as Chesapeake (CHK), Encana (ECA) or Ultra Petroleum (UPL). Anyway, I'd believe that any impact on natural gas will probably be faded.
There is no expectation for Debby to make landfall in the U.S. gulf coast, so refineries should mostly avoid damage.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
