Relax, there’s no risk of someone breaking out in a kumbaya moment, although kudos go to the hordes of heroes who rushed to rescue their fellow man in Houston without regard to race, religion or socioeconomic class in the hurricane. (See Harvey’s Lasting Effect)

No, this is about how the Gulf Coast crude oil and refining/petrochemical industry has increasingly become intertwined with the global market. This was not widely recognized in the immediate aftermath of Harvey. The playbook of prior hurricanes was to drive down crude prices as Gulf Coast refineries went offline, taking down demand.

“Hurricanes Gore the Oil Bulls,” read a Wall Street Journal headline, some two weeks after Harvey hit.

True, but only insofar as the West Texas Intermediate (WTI) price briefly dipped below $46 per barrel (bbl). The trend thereafter for prices—both WTI and Brent—was then set on an upward path to the $50s.

Why?

“U.S. Gulf Coast refineries are far more interlinked with international markets than the last time the market had to accommodate this scale of disruption,” said a J.P. Morgan research note.

While historically the U.S. has been—and remains—a major crude oil importer, the combined traffic today in crude and products is far from a one-way street. In recent years, the Gulf Coast has developed into a key export hub for refined products, with data from the Energy Information Agency showing exports of gasoline, diesel and jet fuel totaling more than 2.6 million barrels per day (MMbbl/d) in July; with resid and other products, the total comes to more than 3.6 MMbbl/d. In addition, exports of crude have averaged more than 750,000 bbl/d this year and, in some weeks, have exceeded 1 MMbbl/d.

Worth remembering is also earlier commentary over the seemingly slow pace of global crude and product drawdowns. Relatively inexpensive onshore U.S. inventory would be drawn down more slowly and only after higher cost overseas inventory, including floating storage, had been largely depleted. If true, that would imply an inordinate reliance on U.S. crude and refined product inventories being able to provide a cushion against surges in demand, especially if overseas customers are pulling on U.S. supply.

This chain of interdependence was broken as Gulf Coast refining capacity was taken down by hurricane Harvey, interrupting output and creating a refined product shortage that couldn’t be filled.

“This is a products-led rally,” said Robert Campbell, head of oil products analysis at Energy Aspects Ltd. “What Harvey did is accelerate a process that was already underway.”

Pre-Harvey, Gulf Coast refineries had been sending growing cargoes to Latin America, particularly Mexico, where refinery outages have exacerbated supply issues. Without Gulf Coast product supply, Latin America buyers have turned to European refiners. The flow from Europe to Latin America has in turn exposed Europe to lower-than-normal seasonal inventory builds, especially in distillates, which traditionally have tended to be sourced from North America.

Tightness in European distillate supply, according to traders, helped drive the early moves higher in Brent prices. Of course, Brent already enjoyed some momentum from OPEC moves to hold back output, and, since then, there have been a number of bullish factors, including higher demand forecasts for oil by the International Energy Agency (IEA) and concerns over possible Kurdish supply issues.

As of early October, Brent futures moved into backwardation, reflecting tightening demand as the near-month contract traded at higher prices than the forward month contracts.

“Overall oil complex tightness is being reflected in a firmly backwardated Brent futures contract,” said Citi in a late September note. “The ICE Brent futures curve is backwardated from March 2018 till 2020.”

With the Brent-WTI spread widening to more than $5/bbl, U.S. crude exports of around 1 MMbbl/d or higher are likely to be a more common occurrence.

Importantly, while a backwardated futures curve is one of OPEC’s strategic goals, another is a long-awaited move lower in inventories to five-year average levels. As of this writing, inventories of U.S. gasoline and distillate have now come close to or are below five-year averages in terms of days of supply.

As these factors reverberate through the global oil market, what is one takeaway offered by the IEA?

“The rise of the Gulf Coast as a major energy hub means that, in some respects, it can be compared to the Straits of Hormuz in that normal operations are too important to fail,” the IEA said in a September Oil Market Report.

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