US Summer Heat, Hurricanes May Spike Fuel Prices, Strain Oil Refiners

A dual threat of record-breaking heat and hurricanes is set to challenge the resilience of U.S. refiners in the coming weeks, raising the potential for highly volatile fuel prices during the peak travel season. The Atlantic hurricane season, from June through November, annually jeopardizes U.S. refineries, especially with half of the country's over 18-million-barrel-per-day refining capacity located along the storm-prone Gulf Coast. Refiners may face more storms than usual this year, with government forecasts predicting up to seven major hurricanes, doubling the annual average. Recently, Citgo Petroleum Corp reduced its output at the 165,000 barrel-per-day Corpus Christi refinery and plans to run the facility minimally during Tropical Storm Beryl, which is expected to regain hurricane strength before impacting Texas.

Hurricane Impact

Beryl's intensity and early timing, as the first Category 5 hurricane on record, suggests a particularly active and disruptive season ahead. Hurricanes pose a significant risk to gasoline prices, often leading to increased fuel demand and stockpiling during evacuation orders. A major storm striking the Gulf Coast could disrupt up to a million barrels a day of fuel supply, resulting in extended outages or even permanent closures, which could spike gasoline prices by 25 to 30 cents per gallon. The offshore Gulf of Mexico region, contributing about 14% of U.S. crude output, could also face similar disruptions, reminiscent of the 1.7 million barrels output suspension during Hurricane Ida in 2021.

Heat Challenges

Beyond hurricanes, refineries are grappling with the challenges posed by unprecedented heat. The latest temperature outlook for the U.S. forecasts above-average temperatures for much of the country in July, typically the hottest month. Refineries, designed to operate between 32 and 95 degrees Fahrenheit, may experience equipment malfunctions and reduced capacity due to triple-digit temperatures. Last year's extreme heat caused a significant reduction in Gulf Coast refining output by 500,000 bpd, and similar impacts are anticipated this year. For instance, unit issues reported by Phillips 66 at its Wood River refinery were attributed to heatwaves.

Maintenance and Stockpiles

On a brighter note, refineries are better prepared due to extensive maintenance earlier this year, allowing for significant upgrades and overdue upkeep delayed by post-pandemic demand surges. This improved readiness could help mitigate hurricane impacts. Additionally, slow demand in recent months has enabled refineries to build considerable fuel stockpiles, providing a buffer in case of outages. U.S. gasoline inventories have increased by about 4 million barrels since early April, reaching approximately 231.7 million barrels by late June, aligning with the seasonal average. Distillate inventories, including diesel and heating oil, have also grown by 3.7 million barrels to 119.7 million barrels, slightly below historical averages.

Outlook

Despite these preparations, the margin for error remains slim. The combined threat of extreme weather and operational challenges underscores the industry's vulnerability and the potential for significant fluctuations in fuel prices in the weeks ahead. The situation remains closely monitored by analysts and industry experts, awaiting further developments as the season progresses.