Viewpoint: Hurricane season becomes annual sour squeeze

US hurricane seasons are growing more intense, disrupting and damaging offshore production and transportation infrastructure, a trend expected to provide annual support to US Gulf sour crude prices.

The 2020 hurricane season was the busiest on record, with 30 named storms in the Atlantic basin and a total of 12 named storms that made landfall in the US. It was the fifth straight Atlantic hurricane season designated as above normal, according to the National Oceanic and Atmospheric Administration (NOAA).

The medium sour Mars stream, produced in the US Gulf of Mexico and delivered in Clovelly, Louisiana, has endured seasonal shortages as offshore pipelines are shut in ahead of the more frequent storms. Prompt Mars — a bellwether for US medium sour prices as well as for offshore supply — has exhibited backwardation and strength against Light Louisiana Sweet (LLS) with each hurricane season.

Seasonal shortages along with higher medium sour prices are expected to continue with intensifying hurricane seasons.

Colorado State University's (CSU) latest qualitative discussion on the 2021 hurricane season outlines five possible scenarios. The most likely scenario forecasts a season with 12 to 15 named storms, six to eight hurricanes and two to three major hurricanes, with a probability of 35pc, according to CSU. The second most likely scenario predicts 14 to 17 named storms, nine to 11 hurricanes and four to five major hurricanes, with a probability of 25pc.

In the 2020 hurricane season, as much as 84pc of offshore production was shut ahead of Hurricane Laura and tropical storm Marco in late August, according to the US Bureau of Safety and Environmental Enforcement (BSEE).

The storm disruptions pushed prompt September Mars prices to a modest 3¢/bl premium over second-month October Mars. It was the first trade month average backwardation trend since the February trade month closed on 24 January, prior to US shutdowns caused by the Covid-19 pandemic.

The storms also narrowed September Mars' average discount to September LLS to 43¢/bl, the second closest trade month gap between the grades since Argus launched volume-weighted average assessments for the grades in 2005. The tightest Mars average discount to LLS occurred during the July trade month at 31¢/bl when successive record tallies of US Gulf coast crude stocks began pressuring coastal sweet prices.

Aside from the short-term transportation disruption, Hurricane Laura also caused long-term damage. US Gulf medium sour deliveries at the Texas coast have been halted for months after storm-related platform damage caused an outage on the Cameron Highway Oil Pipeline System (CHOPS). CHOPS operations are now expected to resume in January.

Although predicted to be less active than the 2020 hurricane season, CSU's likely scenarios could be akin to the 2019 hurricane season, which brought 18 named storms and six major hurricanes.

Peak disruption in 2019 was inflicted in July when Hurricane Barry took 73pc of total offshore production offline. The prompt August Mars premium to second-month September Mars averaged $1.45/bl during the 2019 trade year, the deepest prompt-to-second-month backwardation on average since the September 2014 trade month.

The September Mars discount to LLS averaged 83¢/bl in 2019, which was the narrowest gap on record until the 2020 trade year.

If hurricane seasons continue to intensify, resulting medium sour shortages may call for seasonal sour storage plays ahead of each cycle.

The 2021 hurricane season will begin on 1 June. CSU's first quantitative forecast for 2021 is expected on 8 April. NOAA's Climate Prediction Center will also issue a seasonal outlook in May.

By Alex Endress