Record summer heat and U.S. hurricanes could shake up fuel prices as oil refineries struggle

A combination of record heat and hurricanes will test the resilience of U.S. refineries in the coming weeks, raising the risk of extremely volatile fuel prices at the height of the peak travel season, analysts said.

A combination of record heat and hurricanes will test the resilience of U.S. refineries in the coming weeks, raising the risk of extremely volatile fuel prices at the height of the peak travel season, analysts said.

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

This year, refiners may have to prepare for more storms than usual. Government forecasters expect as many as seven major hurricanes in the coming months, double the annual average of three major Atlantic hurricanes with wind speeds in excess of 111 mph.

Citgo Petroleum Corp was reducing production at its 165,000 barrels per day Corpus Christi refinery on Saturday and plans to operate the facility at a minimum during the passage of Tropical Storm Beryl over the Texas coast, sources said.

Texas' largest ports also closed operations and vessel traffic in preparation for Beryl, which is expected to strengthen back to a hurricane before reaching the area early Monday.

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

"Hurricanes continue to be the biggest wild card for gasoline prices," said Patrick De Haan, analyst at GasBuddy. "There's no better reminder of that than Beryl," he added.

Evacuation orders ahead of storms can increase storage and increase demand for fuel, driving up prices for gasoline, diesel and other refined products, De Haan said.

If a major storm hits the Gulf Coast refining system, it could eliminate up to 1 million barrels per day of fuel supply and cause extended outages or even permanent shutdowns, according to the U.S. Energy Information Administration (EIA).

Hurricanes heading for the Gulf Coast could also disrupt a similar amount of crude oil supply, as the offshore Gulf of Mexico region is home to about 14% of U.S. crude oil production.

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

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

In addition to hurricanes, refineries this year must face more problems related to the scorching heat.

Record heat and hurricane season in the U.S. increase the risk of volatility in fuel prices. Refineries, vulnerable to these phenomena, could face supply cuts and price increases, complicating the situation during the peak travel season.

The latest U.S. monthly temperature forecast calls for above-average temperatures in large parts of the country in July, typically the hottest month.

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

Most refineries are designed to operate between 32 and 95 degrees Fahrenheit. Triple-digit temperatures could lead to equipment failures and a reduction in refining capacity.

Last year's extreme heat led to a 500,000 barrel per day reduction in Gulf Coast refined products production, JPMorgan 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.

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

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

Sluggish demand in recent months has also helped refineries build up fuel reserves, which should act as a buffer in case of outages.

U.S. gasoline stocks have increased by about 4 million barrels since early April to nearly 231.7 million barrels on 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 early April and were at 119.7 million barrels on June 28, slightly below the historical average, excluding 2020, when stocks rose sharply due to COVID-related demand destruction.

"There's not much margin for error," said Tom Kloza, head of energy analysis at Oil Price Information Service. "I'm waiting to see what happens."

Collaboration: Grupo Auge | Reuters (International).