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Hurricane Harvey Highlights Biggest Impact Of U.S. Shale Revolution

Market Watch

A historic hurricane wreaking havoc on offshore Gulf of Mexico oil production isn’t the rally maker it once was. Energy traders say it’s mostly due to the shale revolution.

“U.S. shale has made us much less dependent on Gulf oil and gas production,” said Phil Flynn, senior market analyst at Price Futures Group.

U.S. oil futures CLV7, -1.33%  slumped Monday, with West Texas Intermediate crude dropping 2.5% to $46.67 a barrel on the New York Mercantile Exchange, as market participants assessed the impact of Tropical Storm Harvey, which slammed into the Texas Gulf Coast late Friday as a Category 4 hurricane.

The Gulf of Mexico region accounts for 17% of total U.S. crude-oil production and 5% of total domestic dry natural-gas production, according to the latest figures from Energy Information Administration.

That’s a contrast to roughly 48% of the nation’s total crude-oil production in 2016 coming from tight oil resources, where oil is derived from rock formations, including shale, according to the Energy Information Administration. About 60% of last year’s total U.S. dry natural-gas production also came from tight oil resources.

A decade ago, before the ramp-up in shale output, the Gulf accounted for closer to 30% of U.S. crude output, noted Michael Tran, analyst at RBC Capital Markets, in a Monday note.

“Simply put, there are fewer barrels at risk from an aggregate percentage of U.S. production. In fact, many U.S. offshore Gulf of Mexico barrels have been exported to Asia this year,” Tran said.

But what the Gulf of Mexico lacks when it comes to the energy production share of the market, it makes up for it in refinery activity.

That’s the key reason why gasoline futures RBU7  rallied, while oil futures fell.

“It is interesting to ponder that the U.S. shifted risk from the Gulf of Mexico onshore, inland production…deeply into the Marcellus and Utica [shale plays], and also in the western Texas—the Permian—and into other interior areas,” said Richard Hastings, macro strategist at Seaport Global Securities.

“But the U.S. remains very exposed to the Gulf of Mexico in our refining capacity—and this is very difficult to change,” he said

More than 45% of the nation’s petroleum refining capacity is located along the Gulf Coast, as well as 51% of U.S. natural-gas processing plant capacity, according to the EIA.

The latest reports show that 2 million barrels a day of refinery production has been shut down, said James Williams, energy economist at WTRG Economics.

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