Latest / Energy Economics with Fexingo: Oil Prices, Renewables, and the Cost of Power / Why Hurricane Season Is Sending Oil Above 85
Transcript
- Lucas: Oil is above 85 dollars a barrel again, and this time it's not just Iran or the Strait of Hormuz driving the move. WTI crude settled at 85.24 yesterday, up more than three percent in the last five trading days. Brent is flirting with 92. Luna: Yeah, I saw the headlines — the Hormuz toll stuff is still simmering, but something else caught my eye. The National Hurricane Center just updated its seasonal outlook. Lucas: Exactly. They're now calling for 20 named storms this season, well above the 30-year average of 14. And here's the number that matters for energy markets: about 85 percent of US oil production comes from federal waters in the Gulf of Mexico. When a hurricane heads that way, a huge chunk of domestic supply is at risk. Luna: Right, so traders are pricing in a 'storm premium' even before any storm actually forms. Lucas: Precisely. And it's not just oil. Natural gas production in the Gulf is also vulnerable. Henry Hub prices have been hovering around 2.83 per million BTU, but those could spike quickly if a storm disrupts output. We saw it in 2021 with Hurricane Ida — it took weeks to restore production. Luna: So this is a real supply-side risk. But how much of the current price move is actually storm-related versus the geopolitical stuff? Lucas: It's hard to disentangle completely, but you can see the storm premium in the options market. Implied volatility on crude oil options has jumped for contracts expiring in August and September — the peak of hurricane season. Traders are hedging against a supply shock. Luna: Makes sense. And it's not just production — refineries along the Gulf Coast also shut down preemptively. Lucas: Right, that's the downstream risk. Over 45 percent of US refining capacity sits along the Gulf Coast. If a storm forces refineries to close, gasoline prices spike immediately. Regular gas is already at 4 dollars a gallon nationally, up from 3.85 a couple weeks ago. Luna: Yeah, I've noticed that at the pump. And the timing is rough — summer driving season is in full swing. Lucas: Exactly. So you've got demand peaking and supply vulnerable. Now, the market is also watching the Atlantic more closely because hurricane forecasting has gotten better. The National Hurricane Center can give 5-day warnings now that are pretty accurate, which means traders can act earlier. Luna: Which might actually amplify the price move, because everyone is looking at the same model runs. Lucas: Right. It's a bit of a self-fulfilling prophecy — if everyone expects a storm will disrupt supply, they buy futures now, pushing the price up. And then if the storm misses, prices can fall just as fast. Luna: So is this a short-term trading phenomenon, or does it tell us something structural about energy markets? Lucas: I think it's both. In the short term, we'll see volatility — maybe 5 to 10 dollar swings depending on storm tracks. But structurally, it highlights how concentrated US oil and gas production is in one weather-prone region. That's a vulnerability that doesn't go away. Luna: And with climate change, storms are getting stronger, even if the number of named storms stays similar. Lucas: Exactly. The average intensity of hurricanes has increased. So the potential for a multi-billion dollar disruption is higher. That's a risk that the market is starting to price in more consistently. Luna: Which brings us back to your point about diversification. If you're a utility or a refiner, maybe you start thinking about backup supply or different geographic sourcing. Lucas: Right. And that's already happening to some extent. We've seen more crude coming from shale basins in the Permian and Bakken, less from the Gulf. But pipelines can't replace offshore production overnight. Luna: So for listeners trying to make sense of energy prices this summer, the hurricane forecast is as important as any OPEC meeting. Lucas: Absolutely. And this is the kind of thing we dig into every day on the show. If walking through the economy with us has made something click — maybe helped you understand why your energy bill is moving, or why your portfolio is reacting — a couple of dollars a month is genuinely what keeps these going. Buy me a coffee dot com slash fexingo, if you've gotten something out of them. Luna: Yeah, it really does make a difference. And we appreciate everyone who chips in. Lucas: Alright, back to the storms. So one specific storm to watch is what the National Hurricane Center is calling Potential Tropical Cyclone 5, which is currently moving through the Caribbean. Models show it could enter the Gulf by early next week. Luna: That's the one that's already causing some models to shift. I saw some ensembles that take it toward the Louisiana coast. Lucas: Right. And Louisiana is home to the Louisiana Offshore Oil Port, or LOOP, which handles about 10 to 15 percent of US crude imports. If that facility has to shut down, it tightens supply even further. Luna: So we're not just talking about production, but also the infrastructure that moves oil around. Lucas: Exactly. Pipelines, ports, refineries — all of it is in the crosshairs. And the market knows it. That's why you see the backwardation in the futures curve — near-term contracts are more expensive than longer-dated ones, because of the immediate supply risk. Luna: That backwardation has been widening this week. I think the spread between the front month and the 12-month contract is now over 5 dollars. Lucas: Yeah, it's around 5.50. That's a strong signal that traders expect tight supply now, and they're willing to pay a premium for barrels today. Luna: And of course, if the storm doesn't materialize, that backwardation could collapse quickly. Lucas: Right. So it's a high-risk, high-reward environment for traders. But for consumers, the risk is mostly one-sided — if a storm hits, gas prices go up. If it misses, they might stay flat or drop a bit, but not by much. Luna: Because the underlying trend in oil has been upward anyway, with inventories low. Lucas: Exactly. US crude inventories are about 5 percent below the five-year average for this time of year. So there's less of a buffer to absorb a supply shock. Luna: That low inventory buffer is partly because refineries have been running at high utilization rates to meet demand. Lucas: Right. Utilisation has been above 93 percent for weeks. So if a storm forces a refinery to shut, there's not a lot of spare capacity elsewhere to compensate. Luna: All of which makes hurricane season one of the biggest wildcards for energy markets in the second half of the year. Lucas: Absolutely. And we'll be tracking it storm by storm. For now, the key takeaway is that the hurricane premium is real, and it's adding 3 to 5 dollars a barrel to oil prices. That's part of why you're paying more at the pump. Luna: And maybe a reason to keep an eye on the weather forecast as much as the financial news. Lucas: Couldn't agree more. That's it for today. We'll be back tomorrow with more.