Hurricane season has historically been the most volatile period for freight prices, especially for the tanker market. According to the latest weekly report released by shipbroker Gibson, Category 5 Hurricane Beryl has recently swept across the United States and the Caribbean. Many customers have asked what impact such a hurricane will have on the tanker market. The National Oceanic and Atmospheric Administration (NOAA) predicts that this year we will see the most tropical storms and hurricanes on record. El Niño will be followed by La Niña. The agency predicts that the number of named storms this year will be between 17 and 25, exceeding the average of 15 since 1991; the number of hurricanes is expected to be between 8 and 13, higher than the average of 7 between 1991 and 2023 ; The number of severe hurricanes is between 4 and 7, which is also significantly higher than the historical average of 3. Such an active hurricane season undoubtedly brings broader risks to the crude oil and refined product markets. Still, it’s difficult to predict the overall impact of hurricanes on the market.
According to the Gibson report, the key to monitoring a hurricane is its path and wind intensity. Once a hurricane rises to Category 5, its destructive power is huge, and everything in its path will be severely damaged. However, if oil facilities can be spared from the damage, the impact will be controllable, except for possible delays caused by vessels being diverted to avoid danger. However, if the hurricane hits offshore oil fields and causes production to be suspended for a long time, the impact will mainly be on the export demand of crude oil tankers in the United States and the Caribbean. The total daily output of offshore oil fields in the United States and Mexico is as high as 3.5 million barrels, including medium and heavy crude oil that are hot in the market. In extreme cases, if local supply is interrupted for a long time due to hurricanes, it may stimulate demand for offshore crude oil imports.
Refineries are also a key factor affecting the market. Refineries along the coasts of Texas and Louisiana account for half (48%) of total U.S. refining capacity. These plants play a crucial role in supplying fuel to the U.S. domestic market. In 2023, these refineries will export 2.1 million barrels of oil per day overseas. Once refining operations are disrupted and exports of oil are reduced, the product tanker market in the U.S. Gulf of Mexico will inevitably be hit.
However, the shutdown of large U.S. refineries may also bring a ray of hope to product tanker freight. The U.S. Atlantic coast, in particular, relies heavily on pipeline transportation from the Gulf of Mexico for its oil supply. Once Colonial's pipeline oil supply is cut off, these vacancies will usually be filled by refined oil products from Europe. In this way, the freight rate of MR tankers on the UK-US Atlantic route (TC2 route) will be supported. The closure of Gulf of Mexico refineries is also good news for local crude exports. If U.S. refineries are unable to digest domestic and regional crude, more crude will likely be exported. In addition, if the restrictions on coastal trade under the Jones Act are temporarily relaxed, it will also have a positive effect on the international tanker market.
Gibson concluded that because each hurricane is unique, the specific impact is difficult to predict except for increased fluctuations in freight prices. Interestingly, U.S. refineries have significantly improved their post-disaster recovery efficiency. In 2005, during hurricanes Katrina and Rita, it took nearly three months for Gulf Coast refineries to return to pre-disaster capacity. By 2017, after hurricanes Harvey and Irma, it only took 29 days to resume production. However, if high-intensity hurricanes are as frequent as forecast, both refiners and crude oil producers will face severe challenges in maintaining stable production.