BofA Equity Research Take on impact of Ida

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Ida makes landfall as a cat 4 Hurricane in Louisiana

Ida, the storm that rapidly intensified into a category 4 hurricane made landfall at Port
Fourchon, Louisiana late Sunday morning. Top wind speeds were estimated at 155mph,
bringing with it a storm surge of 16 feet, making for a significant direct hit. As the eye
of the storm carves a path inland towards Baton Rouge (1am CDT est. arrival), wind
speeds will be reduced but are expected to maintain hurricane strength at 80mph.
Strong winds threaten to pull down power lines and other infrastructure, but flooding is
viewed as the bigger risk for refinery downtime, given that it inundates power
infrastructure and impedes the mobility of staff. According to the NOAA, the storm is
expected to drop more than 15 inches of rainfall over a five day period in the center of
the storm; over the New Orleans area. For reference, Harvey (2017) was a catastrophic
rain event, which was pinned in place by another weather system, allowing for
accumulated rainfall of 50-60 inches in some areas. Ida is no Harvey.

2.5 million b/d of refining capacity at risk
Through Sunday, we have seen explicit announcements for storm preparations for
approximately 2.1 million b/d of refining capacity; which is nearly all of the region’s total
capacity of 2.5mmb/d; roughly equal to 30% of the Gulf Coast and less than 15% of total
US. How long this capacity stays offline will depend mainly on how quickly power can be
restored, which is subject to a wide range of outcomes. Last year, Laura barreled
through the Lake Charles, Port Arthur refining hub; Port Arthur came back within a week
while Lake Charles stayed down for months due to extensive damage to utility lines.

Price impact may be more Laura than Harvey
Laura is the best proxy to assess the impact to refined products for two reasons; August
2020 was also impacted by COVID, and the size of the refining hubs is similar. Though
the primary difference is that gasoline and diesel inventories are much tighter. Total US
gasoline is down 8 million barrels and trending at a five year seasonal low; and Total US
distillate is down 40 million barrels, noting that 2020 is an unusual comp due to COVID,
and current levels are easily within the five year band. Regionally, PADD 1 is tight in both
products. Between Wednesday and Friday trading, gasoline and diesel prices were
essentially flat showing little to no disruption premium.

Lower demand environment can curb price response
Downstream will likely see the greater disruption, but the extent to which is still a question
mark and depends on how long capacity is down, which is a question of power restoration.
At this point, we do not see this as a Harvey-level refining event; but more of a Laura-level
refining event, where the disruption can be absorbed by higher runs elsewhere in the
system – though inventory levels are already low. High beta refining stocks have the most
to gain on sustained disruption, PBF Energy, HollyFrontier and Delek. According to BSEE oil
production shut-ins have risen to 1.74 million or 95.7% of Gulf of Mexico production,
bringing the total to 4.6mmb since Friday. The biggest commodity bid we have seen thus
far due to the storm is for US Natural Gas, which jumped from $3.9/MMBTU to
$4.38/MMBTU from Wednesday to Friday – the highest price since 2014, due to a tight
international market that has kept LNG exports at capacity. However, near term
our experience in prior events is that commodity traders sell the news.

The majority of oil production platforms are situated off the Louisiana coast, and
therefore are in harm’s way of Hurricane Ida. The Bureau of Safety and Environmental
Enforcement monitors oil and gas production in the Gulf of Mexico, and provides daily
updates in the event of major disruptions. BSEE has been monitoring the situation since
Friday, and has reported increasing platform outages. As of Sunday, it is estimated that
1.74 million b/d of oil production has been shut-in – this is nearly all of Gulf of Mexico
(GoM) volumes. In addition, BSEE reports that over 2 billion cf/d of natural gas
production has also been shut-in, which is equal to 94% of GoM volumes.

Refining capacity is not monitored by a central government agency. Since Friday,
companies began announcing contingency measures (ie. idling equipment, shutdowns
etc.). The region is home to 2.5 million b/d of refining capacity, of which around 2.3
million b/d is operational (ie. Shell Convent shutdown). As of Sunday, nearly all refineries
have indicated some impact due to the storm. The duration of the impact will depend on
the extent of power outages, which have a wide range of outcomes. Strong hurricane
winds will play a part, but more important will be rainfall – 15 inches is expected to fall
in New Orleans, far less than the impact from Harvey which dropped 50-60inches in
some areas. The storm is expected to reach Mississippi by mid-morning Monday.