Crude-oil prices surged on Monday as it became clear that Tropical Storm Rita would threaten the Gulf Coast, then prices fell on Tuesday morning when the National Hurricane Center forecast a more southerly path for Rita that might spare the Houston area, and then yesterday afternoon and overnight, prices rose again as the storm evolved into a major hurricane.
Such are the vagaries of predicting hurricane tracks and commodity markets.
Oil prices settled Tuesday afternoon more than $1 a barrel lower than Monday’s closing price as early Tuesday projections had Rita coming in closer to Freeport so that the brunt of the storm would miss the Houston area refineries. Those initial reports triggered a drop of more than $2 a barrel in oil prices, but those prices recovered quickly during the day as Rita strengthened into a major hurricane and evacuations from offshore rigs picked up. At the New York Mercantile Exchange, the October crude contract ended $1.16 lower from its Monday high at $66.23. October gasoline closed at $1.9766 a gallon, down 6.61 cents for the day and October heating oil, up more than 20 cents Monday, ended at $2.0113, down 2.71 cents.

Refineries that are located on the southeast side of the Houston metro area in or near the cities of Pasadena, LaPorte, Texas City, and on east toward Beaumont and Port Arthur generate about 13% of total U.S. refining capacity. Although Hurricane Rita could cause even more damage to the offshore drilling and production infrastructure in the Gulf of Mexico that was already extensively damaged by Hurricane Katrina, the trading markets’ even more critical concern at this point is that Rita will hammer Houston’s refineries, which would have a huge effect on U.S. refinery capacity.
James Hamilton made a good point awhile back that underscores the importance of Houston’s refineries. Older refineries cannot process heavy, sulfur-rich “sour” crude oils (Mexico’s Maya grade crude is an example of a common sour crude) and even newer refineries cannot process such sour crudes as efficiently as light, “sweet” crude oil. Consequently, if Houston’s modern refinery facilities are shut down by the storm, then demand for light, sweet crude will rise and push its price even higher relative to lower-grade crudes. Inasmuch as about 75% of the crude oil that OPEC countries produced last year was sour, OPEC’s promise to increase output has had little effect on trading markets that are more concerned about refinining capacity. Although OPEC has incrementally increased its production of sweet crude since 2000, world production of sweet crude has declined steadily since that time.
Finally, the Chronicle’s Tom Fowler has this informative article today about the Houston area’s refineries and the potential market impact of damage to those facilities.