How Will Harvey Impact Oil And Gasoline Prices?

Flooding from Hurricane Harvey is devastating the Houston and Galveston areas of Texas, major hubs for U.S. oil refining. Royal Dutch Shell plc (ADR) (NYSE: RDS-A) (NYSE: RDS-B), ExxonMobil Corporation XOM and other major refiners have already shut down more than 1 million barrels per day of refining capacity in the region.

Although South Texas is also a center for oil and gas production as well, the Bureau of Safety and Environmental Enforcement said on Sunday that only about 378,000 barrels per day of production have been disrupted from the storm.

In other words, at least at this point, lost refining capacity far exceeds lost production, meaning the nations refining logjam is set to get even worse until Houston plants get back online. From a practical standpoint, less refining capacity will likely mean higher gasoline prices and lower oil prices, a dynamic that is already playing out in the market Monday morning.

The national U.S. gasoline price on Monday stands at $2.38 per gallon, up more than 5 cents from a week ago. WTI crude oil prices were down 0.8 percent in early Monday trading to under $48/bbl.

“Gas prices are up in many places and motorists should be gearing up for more in the coming weeks, thanks to Hurricane Harvey inundating significant refineries along the Texas coastline, leading to closures and tilting the delicate balance of supply and demand," said Patrick DeHaan, senior petroleum analyst for GasBuddy.

Related Link: A Host Of Upgrades For Offshore Oil Companies As RBC Sees A Recovery

Drivers shouldn’t expect the pain at the pump to go away anytime soon, even if the rainfall ceases in Texas.

“The impact could linger for several weeks or longer, depending on how long it takes Texas refiners to return to normal operations,” DeHaan said.

In the meantime, oil and gas traders will be watching the weather closely and keeping an eye on both the United States Oil Fund LP (ETF) USO and the United States Gasoline Fund, LP UGA.

Disclosure: The author is long RDS.B.