Energy Default Risk Sees Little Change after Harvey

While Hurricane Irma continues to devastate Florida, the economic costs of Hurricane Harvey, beyond the human toll, are starting to be evaluated for the states of Texas and Louisiana. The storm is likely to have little impact on the default risk of the North American energy sector, according to Moody’s Analytics’ Expected Default Frequency (EDF) probability of default metrics. The sector’s average one-year EDF fell by 0.06% from its level prior to Harvey’s landfall in August, indicating a lower level of default risk. Most energy subsectors participated in the decline, Moody’s said.

The hurricane caused an immediate drop of over three million barrels a day in refinery output, with smaller declines in the demand for petroleum products and crude oil production. The small change in energy sector risk goes hand in hand with Moody’s Analytics’ evaluation that the region’s economy should recover quickly and that the hurricane will have only a small effect on the national economy, though southeastern Texas and Louisiana house 21% of the United States’ refining capacity. Moody’s estimates that 45% of the refining capacity shut down by Harvey is already back on line.

Some refineries, however, suffered more severe damage than others and will be slower in restoring operations. Moody’s estimates that refinery profit margins will rise in the near term as a result, since the reduction in capacity gives leeway for the remaining companies to increase prices. Moody’s further estimates that the price of energy will be higher in the coming months because of a minimal decrease of demand for petroleum products and the shutdown, though temporary, of several offshore and shale oil and gas rigs. The higher energy prices will make it economical to resume drilling and production, with strong demand for rigs, the ratings agency said.

– Adam Fusco, associate editor

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