Crude oil slid and gasoline futures hit their highest since mid-2015 on Wednesday as flooding and damage from Tropical Storm Harvey shut over a fifth of US refineries, curbing demand for crude while raising the risk of fuel shortages. The outages in America's energy hub will significantly curtail the supply of gasoline.
Diesel futures also witnessed a jump of 1.2% in prices to $1.6854 a gallon. While significant, that represents a much calmer reaction than the initial 7% spike on Sunday night. "It's going to be really hard to pinpoint because we don't know the damage".
The eventual hit to USA oil demand will ultimately be larger than the impact on supply, Goldman Sachs predicted.
The "slow moving nature of the storm will likely lead to these shutdowns continuing in coming days and may generate persistent damage as well", the analysts wrote.
Massive flooding in southeast Texas has already impacted gasoline prices in the surrounding area, and one expert says the same could soon happen in Canada. The average gallon of gas in the USA fetched $2.368 on Monday, compared with $2.334 a week ago, according to AAA.
US gasoline prices were over 3 percent higher at $1.8380 per gallon.
That's why the USA has about 230 million barrels of gasoline stockpiled, more than before the storms in 2005 and 2008.
However, the data was collected before Hurricane Harvey hit the Gulf Coast. Prices fell sharply yesterday as Hurricane Harvey flooding crippled the Texas coast. Oil refineries in Corpus Christi operated by Citgo Petroleum, Valero Energy Corp, and Flint Hills Resources have also started to shut down ahead of the landfall.
Refinery operations along the Texas coast may be interrupted for weeks, limiting the demand for crude oil.
Beyond pump prices, the storm has the potential to take a bite out of the North American economy, if the heavy hit to the energy sector spreads - and lasts. "For all intents and purposes, there's little to no gasoline consumption in that market right now". Now, the region makes up just 15% of the nation's oil production, according to RBC Capital Markets.
Other sectors are also slowly emerging from Harvey's mess. Forecasters warn that the storm may cause historic flooding in Louisiana, another low-lying state that is critical for refining. About 22 percent, or 378,600 barrels a day of Gulf of Mexico oil production is offline, according to the Bureau of Safety and Environmental Enforcement. "Although this is less than 20 percent of total refining capacity in the United States, the Gulf Coast region is a major supplier of refined products both locally, and into other parts of the country", Delaney said.