U.S. gasoline prices jumped higher Monday in the wake of Hurricane Harvey, but if 2005's Hurricane Katrina is an accurate precedent, any lasting gains for the refining sector or broader energy prices will be short-lived.
The weather-related upheaval in energy markets arises from the interruption in refining activity. In terms of scale, while accurate numbers on Harvey-related Texas outages are not yet available, the business dislocations are likely much larger than for Louisiana in 2005. According to the Energy Information Agency, Texas refining capacity is 70 per cent higher than Louisiana's, at 5.6 million processed barrels per working day.
The first chart below shows the progress of U.S. gasoline prices and refiner profitability in the 12 months after Hurricane Katrina. The 3-2-1 crack spread approximates the profit for refiners from converting three barrels of crude into two barrels of gasoline and one barrel of distillate products like jet fuel and kerosene.
Hurricane Katrina hit land on August 25, 2005 and gasoline prices and refiner profitability surged higher initially. Refiners were able to take advantage of higher prices by converting stored crude into gasoline and improved their profits margins.
This party was short-lived. From September 28, 2005 to February 2006, refiner margins fell almost to nothing, and gasoline priced plummeted from above $3 per gallon to just over $2.
The second chart shows a similar pattern for oil prices in the 12 months after Hurricane Katrina, only in this case crude did not enjoy an initial move higher. The close relationship between oil prices and crack spreads also highlights the importance of refiner demand for crude. Consumers don't consume oil, they buy refined products. It's the refiners who demand oil directly, they want less when profitability declines, and the crude prices often suffers accordingly.
The Katrina precedent doesn't provide much reason for post-Harvey optimism in energy sectors but there are important caveats in comparing the two events. Texas refining capacity, as mentioned, is much larger than Louisiana's and a more widespread drop in activity could cause more bullish results for investors. The energy market backdrop is also much different than 2005, with lower commodity prices and early signs that the North American crude glut might be abating.
Market opportunities based on natural disasters causing widespread human suffering can, and probably should, cause some ethical queasiness. Based on the period following hurricane Katrina, investors can feel free to listen to the internal voice that suggests rooting for displaced Houston residents without considering new investments in the oil patch based on Hurricane Harvey.
Scott Barlow