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Tropical Storm Harvey springs back life, now threatens one-third of U.S. refining capacity

The energy industry is closely watching a developing storm that could become the first hurricane to make landfall in Texas in nine years and dump as much as two feet of rain on the heart of the U.S. refining industry.

If Harvey becomes a Category 1 hurricane, as expected, it would be the first to come ashore in Texas since Hurricane Ike in 2008. So far a tropical depression, Harvey was just a remnant of a tropical storm until Wednesday, when it reformed and was heading towards the U.S. Gulf Coast from the Yucatan Peninsula.

Nearly half of U.S. refining capacity is on the U.S. Gulf Coast from Alabama to Texas, and nearly one-third of U.S. capacity appears to be in Harvey’s path on the Texas and western Louisiana coastlines. While the storm is not expected to become a major hurricane, it could be a major flooding event that would disrupt refining and possibly drilling operations.

“The main danger with this storm does not seem to be wind, it is the amount of rain and it looks set to stall over the Texas coast,” said Jacob Meisel, Bespoke Weather Services’ chief weather analyst. “This is something we’re watching even for onshore [drilling].”

Meisel said the storm is unpredictable, and the models are varied. “The amount of rain some of our weather models are printing out for this storm are totals that are almost unbelievable,” he said. “We’ve been seeing models that say 12 to 24 inches of rain is not out of the question for the Houston area over a few days if the storm stalls there.”

The oil industry was already making preparations, with Anadarko pulling workers from its Gulf of Mexico platforms, and refiners assessing their operations. Harvey looks set to cut across offshore drilling rigs, but it’s the refineries that are more at risk.

“This is much more impact on refining especially if it becomes a flooding event,” said Andrew Lipow, president of Lipow Oil Associates. “They may be forced to reduce runs if they are not able to receive oil from vessels or export their surplus product,”

According to Lipow, 31.6 percent of U.S. refining capacity is located between Lake Charles, La., and Corpus Christi, Texas. He said if the storm becomes a category 1 hurricane, a rule of thumb is that it could take about a week to restore refining operations, and as much as two weeks if it becomes a category 2.

Oil prices rose Wednesday, but gasoline futures had much sharper gains, as some traders speculated the flooding could temporarily keep gasoline from Texas and Western Louisiana off the U.S. market because of transportation problems or shuttered refineries.

West Texas Intermediate crude futures were up 1.2 percent at $48.41 per barrel. Crude also rose after the Department of Energy reported a drop of 3.3 million barrels in oil inventories last week, as well as a decline of 1.2 million barrels of gasoline.

“It could still be disruptive. You can’t have this magnitude of potential shut ins without seeing prices go up, ” said John Kilduff, energy analyst with Again Capital. “This could be a hiccup. It will be temporary but it could be a hell of a spike. “

Meisel also said there was a model showing rainfall of up to four feet, so he said the danger is unpredictable intense areas of flooding.

“You’ll get really intense bands of rainfall that are really narrow. What you can get are pretty crazy totals of rainfall differences across a very small area. That’s where the main uncertainty lies right now,” said Meisel. “We’re pretty convinced that the storm will make landfall in southern or coastal Texas. We’re pretty sure it’s going to be a strong tropical storm or weak hurricane. The question is where do those bands show up.”

Kilduff said there could be shut-ins due to power loss or just the inability for workers to reach refining areas, which line the coast.

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