Hurricane season is traditionally the most volatile time for freight prices, especially for the tanker market. According to the latest weekly report from shipbroker Gibson, Category 5 Hurricane Beryl recently swept through the United States and the Caribbean. Numerous clients 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 witness the most tropical storms and hurricanes ever recorded. The El Niño will be followed closely by La Niña. According to the agency, the number of named storms this year is predicted to be between 17 and 25, exceeding the average of 15 since 1991; the number of hurricanes is expected to be between 8 and 13, which is higher than the average of 7 during the period between 1991 and 2023; and the number of strong hurricanes will be between 4 and 7, which is also a significant rise from the historical average of 3. Such an active hurricane season undoubtedly poses broader risks to the crude oil and refined products markets. That said, it remains difficult to predict the overall impact of hurricanes on the market.
According to the Gibson report, the key to monitoring hurricanes is their path of travel and wind strength. Once a hurricane reaches Category 5, it can be so destructive that it hits everywhere in its path. But if oil facilities are lucky enough to be spared, the impact will be manageable, except for a few delays that may be caused by ships being diverted to avoid danger. But if the hurricane directly hit the offshore oil fields, resulting in a prolonged production standstill, then the impact will be mainly affected by the United States and the Caribbean region's crude oil wheel export demand. Together, the US and Mexico produce up to 3.5 million barrels per day (bpd) of offshore oil, including a lot of medium and heavy crude, which are hot commodities in the market. In extreme cases, if local supplies are disrupted for an extended period of time due to hurricanes, this could instead stimulate demand for offshore crude imports.
Refineries are also a key factor influencing the market. Refineries located along the coasts of Texas and Louisiana account for half (48 per cent) of total US refining capacity. These plants play a pivotal role in supplying oil to the domestic market in the U.S. In 2023, these refineries exported 2.1 million barrels of oil per day overseas. Once refining operations are disrupted and exported oil volumes are reduced, the U.S. product tanker market in the Gulf of Mexico will inevitably take a hit.
However, the shutdown of large U.S. refineries may also bring a silver lining to product tanker shipments. Especially the U.S. Atlantic coast, its oil supply depends largely on the Gulf of Mexico pipeline transmission. Once Cononial (Colonial) pipeline oil supply, these vacancies will usually be filled by refined products from Europe, so the United Kingdom to the U.S. Atlantic route (TC2 route) MR-type tanker freight rates will be supported. The closure of refineries in the Gulf of Mexico is also good news for local crude exports. If U.S. refineries are unable to absorb domestic and regional crudes, it is likely that more crude will be exported. In addition, if the Jones Act restrictions on coastal trade are temporarily eased, it will also have a positive effect on the international tanker market.
Gibson concludes that since each hurricane is unique, it is difficult to predict the exact impact other than increased up and down swings in freight prices. Interestingly, U.S. refineries have become significantly more efficient at recovering from disasters. in 2005, when Hurricanes Katrina and Rita were raging, it took nearly three months for Gulf Coast refineries to return to pre-disaster capacity. By 2017, on the other hand, after Hurricanes Harvey and Irma, it took just 29 short days to resume production. However, if high-intensity hurricanes are really as frequent as forecast, then both refiners and crude oil producers will encounter a severe test in keeping production stable.
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