Low US Oil Reserves to Clash with ‘Above Normal’ Hurricane Season

After initially forecasting a hurricane season of near normal activity, the National Oceanic and Atmospheric Administration (NOAA) is predicting a more turbulent 2023 Atlantic hurricane season.

The agency said activity is now expected to be at an “above-normal” level of activity, in part due to sea surface temperatures at record highs.

“The main climate factors expected to influence the 2023 Atlantic hurricane activity are the ongoing El Niño and the warm phase of the Atlantic Multi-Decadal Oscillation, including record-warm Atlantic sea surface temperatures,” Matthew Rosencrans, lead hurricane season forecaster with NOAA’s Climate Prediction Center, said in a press release.

Nevertheless, analysis by Enverus Intelligence Research (EIR) shows that, historically, commodity prices are quick to recover in the event of powerful storms. However, a depleted U.S. Strategic Petroleum Reserve (SPR) may complicate the government’s ability to respond to price pressures in the event of a major weather event.

While El Niño weather patterns usually cause atmospheric conditions that lessen tropical activity during hurricane season, they have been slow to develop. Climate scientists say the associated conditions might not appear during the hurricane season.

NOAA forecasters have increased to 60% the likelihood of an above-normal Atlantic hurricane season. The updated 2023 outlook calls for 14 to 21 named storms, of which 6 to 11 could become hurricanes with winds of at least 74 mph. Of those hurricanes, at least two are expected to become major hurricanes (a storm with winds of at least 111 mph). Hurricane season ends Nov. 30.

In response to NOAA’s report, EIR analyzed the adverse effects such storms could have on the industry.

“Should a hurricane disrupt oil and gas production in the GoM [Gulf of Mexico], EIR’s mid-impact case estimates 40% of total GoM production would be shut in and take seven days to recover; and a high-impact case estimates 90% shut-in and 16 days to recover,” Marvin Ma, report author and vice president at EIR, said in a press release.

In the past, hurricane related shut-ins have not led to material or durable changes in oil prices, as the SPR is normally able to supplement losses in supply. However, depressed SPR stocks might weaken the government’s ability to respond to any supply disruptions this season. Storms can also disrupt natural gas prices, as there is no reserve in place for them.

“Should a hurricane pass through, we estimate a serious bullish impact on global gas prices but a bearish effect on Henry Hub prices,” Enverus said in its report.

Historically, only one of 61 floating production structures in the GoM have been destroyed by a hurricane. Using that data, Enverus estimated a $4 million loss for a case in which production is deferred by one year and $33 million worst-case scenario loss where a platform is destroyed. Insurance oftentimes mitigates weather-related losses.

Outside of those concerns, EIR estimates an average hurricane season impacts GoM production by 3% during the third quarter. While hurricanes could cause significant downtime, production is expected to resume and reach pre-hurricane levels.