Back to Back: Hurricane Laura Bears Down on Gulf Coast

Published by Matt Warder on August 25, 2020

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It seems like just yesterday I was battening down the hatches in my garden as Tropical Storm Isaias barreled its way up the East Coast.

But hurricane season moves fast, and this week we have seen not just one, but two named storms with the potential to do damage along the Gulf Coast.

And while Marco largely fizzled out as it approached Louisiana, Laura was upgraded to a Category 1 hurricane just a few hours ago, and has the potential to reach Category 3 status.

Source: The Weather Channel

In baseball terms, that makes the back-to-back punch of these storms less like Babe Ruth/Lou Gehrig, and more like Mark McGwire/Jose Canseco… powerful enough to take seriously, but able to be pitched around.

Plus, Gulf Coast refiners know this drill very well, and some have already shut down in anticipation of Laura’s landfall. They’re happy to do it, too, as storage levels remain at all-time seasonal highs and production will need to adjust lower over time.

Source: EIA, Bloomberg

And in truth, refiners have already been doing this to some degree, ratcheting back capacity utilization levels to multi-decade lows as US demand remains subdued due to knock-on effects from the COVID-19 outbreak.

Source: EIA, Bloomberg

So, with roughly 82% of oil production already shut in anticipation of landfall, it seems likely that crude prices will head up temporarily, ultimately squashing the run-up in crack spreads that have bolstered refiners over the couple of weeks.

Source: EIA, Bloomberg

So, in order to figure out potential post-Laura market impacts, we need to take a look at where the storm is headed, how fast it’s moving, and what assets are in its path.

Mapping Out the Game Plan

There are four factors that need to be considered in any storm assessment – wind speed, storm speed, storm surge, and total precipitation. Different combinations of each can result in widely different outcomes, from the high wind and storm speeds that flattened crops in Iowa a couple weeks ago, to the lower storm speed and higher precipitation of Hurricane Harvey, to the massive strength we saw in every category with Hurricane Katrina.

At first glance, winds are projected to be fairly strong at a top speed of 115 mph before landfall – enough to cause a high degree of damage to homes, industrial facilities, and power infrastructure. But as the storm should be moving quickly as it approaches land, and winds are expected to die down to Category 1 levels –still serious, but much more manageable.

Source: CNN

From a storm surge perspective, most projections show the worst surge possibilities at around 9 to 13 feet in the Sabine Lake region near Port Arthur, TX through Cameron, LA.

Source: The Weather Channel

But the amount of rainfall doesn’t exactly look to be an issue – compared to a slow-moving storm like Harvey that dumped over 40 inches of rain on the Houston area, Laura’s upper estimates are only in the 8 to 12-inch range.

Source: The Weather Channel

So, with a relatively quick storm speed, and modest rainfall, we really only need to focus on winds (which damage rigs and infrastructure) and storm surge (which causes flooding and damages industrial facilities.) When we look at the assets in the storm’s likely path, however, we can see quickly that most of the refineries and oil rigs lie outside the forecast.

Source: Bloomberg

And in fact when we zoom in and limit the view to only the assets in the storm’s path, we can see that is comprised of only 3 operational refineries (orange dots) – not likely enough to move gasoline or crude oil markets longer-term.

Source: Bloomberg

So that leaves flooding/storm surge as the last serious factor, and while that’s unlikely to seriously affect the refineries, there is one facility that might be affected – Cheniere’s Sabine Pass LNG facility (marked in blue below.)

Source: Bloomberg

Looking closer at their infrastructure shows the facility is built up about 10 feet, with some additional floodwall coverage. As such, the port berth will likely escape unscathed in all but the absolute top range of projected water levels.

Shares of Cheniere (NYSEAmerican: LNG) are down about 2% in anticipation of the storm, and may continue heading lower tomorrow toward recent support at $50.50 per share. As such, I don’t mind it as a short-term speculation below $51, with an upper-end price target of $55, with a maximum hold time of a week.

Source: Yahoo! Finance

Both gasoline and crude oil are running today, but as I’ve shown, overall impacts on those markets are likely to be minimal… and I’m not the only one saying so. As such, we may take short positions on each – especially since Labor Day marks the end of this year’s lackluster driving season.