36 • OIL&ENERGY
Market Stance
With Hurricane Season Upon Us, Be Prepared
Wet barrel contracts offer price protection and priority
By Daniel M. Lothrop, Hedge Solutions
THE 2013-2014 ATLANTIC HURRICANE SEASON
has had a relatively quiet start, with four
named storms, no hurricanes, and no dis-
ruptions to oil and gas infrastructure at the
time of this writing in mid-August.
Back in May, the National Oceanic and
Atmospheric Administration (NOAA) had
predicted a well above average to hyperac-
tive hurricane season. Specifically, NOAA
gave a 70 percent likelihood that there
would be 13 to 20 named storms, seven to
11 of which could become hurricanes, with
three to six being major hurricanes. The
Atlantic hurricane season begins on June
1, and lasts through the end of November.
This month marks the height of the peak
period, which runs from August through
October.
SCALED BACK FORECAST
On August 8, NOAA trimmed its fore-
cast for the current season. NOAA now
sees extreme levels of activity as less likely
but still expects this season to hold above
normal tropical activity, with 13 to 19
named storms, six to nine hurricanes, and
three to five major hurricanes.
Although there has been no hurricane
formation thus far, the formation of two
named storms early in the season in the
deep tropical Atlantic, Chantal and Dorian,
is a reason NOAA cites for maintaining
their prediction of an active season. Years
with early storm formation in the area show
a greater likelihood of being more active.
Hurricanes can have an impact on both
the supply and the price of refined products
on the East Coast, either directly or indi-
rectly, by impacting crude oil. One avenue
for this impact is through disruptions in the
Gulf Coast, such as with hurricanes Gustav
and Ike in September of 2008.
The recent boom in domestic oil and
gas production due to horizontal drilling
and hydraulic fracturing has reduced the
share of offshore production within the U.S.
total. In May of 2009, for instance, offshore
crude oil production in the Gulf of Mexico
contributed 28.8 percent of total domestic
production. This May, offshore operations
in the Gulf accounted for just 16.6 percent
of total U.S. field production of crude oil.
Although this shift may have lessened
the sensitivity of the country’s oil produc-
tion infrastructure to disruptions from hur-
ricane activity in the Gulf, it is still a large
share of domestic production and a factor
to watch for.
REFINING IN HARM’S WAY
More importantly for marketers of
refined products, however, is that a very
large share of domestic refining capacity
lies on the Gulf Coast. As of early 2012,
44 percent of total refining capacity, or 7.7
million barrels/day (MBD) out of 17.3 MBD,
was located along the Gulf Coast in Texas,
Louisiana, Alabama and Mississippi.
Since then, Motiva has completed a
325,000 barrels/day expansion to its Port
Arthur, Texas refinery, making it the largest
in the country at 600,000barrels/day. Refined
products make their way up to Greensboro,
NC in large part via Colonial Pipeline’s Line
01 (main gasoline pipeline), Line 02 (main
distillate line), and from there to markets
further north via the mixed-products Line
03, which terminates in Linden, NJ.
Line 03 was expanded this year by
60,000 barrels/day to nearly one million
barrels/day. Meanwhile, refining capacity
on the East Coast has been on the decline
due to poorer refinery economics with
facilities geared toward light, sweet crude
grades priced on the Brent benchmark,
which held a wide premium over West
Texas Intermediate (WTI) until recently.
Operable East Coast capacity in May
was 1.2 MBD – just 6.7 percent of the 17.8
MBD of total U.S. capacity. By contrast, in
November of 2009, regional refiners were
capable of producing 1.6 MBD. Earlier this
year, Hess Corp. closed its 70,000 barrels/
day refinery in Port Reading, NJ. Prior to
that, a combined total of 443,000 barrels/
day of refining capacity was lost as the
Marcus Hook (PA), Eagle Point (NJ) and
Yorktown (VA) refineries were shutdown
and converted to other uses.
NOT JUST THE GULF
This past hurricane season serves as
poignant reminder that storms outside of the
Gulf Coast can have a strong impact on the
East Coast fuels market – and that the impact
can be longer lived than one might think.
Last year’s season saw 19 named storms,
two of which became major hurricanes
including Hurricane Sandy, which made
landfall in late October and took 200 lives
and caused over $70 billion in damage.
SuperstormSandy also caused Colonial’s
Line 03 and two refineries (Hess’s Port
Reading and Phillips 66’s Bayway) to be
shut, and affected supply operations at New
York Harbor – a major source of imports –
and a large number of terminals and other
facilities in the area either through flooding
or loss of electrical power.
Average daily deliveries of gasoline and
distillates fell to 72 percent and 56 percent
of pre-storm levels in the Nov. 7-13 period.
Release of 120,000 barrels of ultra-low sulfur
diesel from the Northeast Home Heating
Oil Reserve (which had been high-sulfur
number 2 heating oil in the past) as well as
various waivers, including a waiver of the
Jones Act allowing non-U.S.-flagged ships
to transport products, were authorized in
order to alleviate supply conditions.
BASIS BLOWOUT
Despite these measures, rack basis differ-
entials to NYMEX heating oil futures, which
had jumped as the storm made landfall,
