MARKET WATCH
Energy prices seesaw as Katrina fools markets

Sam Fletcher
Senior Writer

HOUSTON, Aug. 29 -- Energy prices shot to new highs in early trading Aug. 29 after Katrina, a category 4 hurricane, ripped through the oil and natural gas producing area of the central Gulf of Mexico and came ashore before dawn east of New Orleans.

Energy prices had plummeted during the last trading session on Aug. 26 when a much weaker Katrina was threatening southeast Florida. Traders badly underestimated Katrina's ability to strengthen and swing west to threaten Gulf Coast production and refining.

Production, refining curtailed
The US Minerals Management Service's regional office in New Orleans reported only 12 production platforms and 9 drilling rigs in the Gulf of Mexico had been evacuated as of Aug. 26, with no production shut in at that time. However, offshore operators escalated the evacuation of crews and reduced production over the weekend as Katrina crossed Florida into the gulf, gathering strength as it moved west. By Aug. 28, the MMS regional office had relocated temporarily to its emergency facility in Houston as many residents evacuated low-lying New Orleans.

"Royal Dutch Shell PLC estimated 420,000 b/d of oil and 1.35 MMcfd of natural gas would be shut in at its central and eastern gulf facilities. ExxonMobil Corp. said it has ceased daily production of 3,000 bbl of oil and 50 MMcf of gas. Valero Energy Corp. evacuated all but a few workers at its 260,000 b/d St. Charles refinery on [Aug. 27]. ConocoPhillips shut its 247,000 b/d Alliance refinery; Murphy Oil Corp. shut down its 120,000 b/d Meraux, La., refinery; and ExxonMobil planned to shut down its 183,000 b/d refinery in Chalmette, La," said James K. Wicklund, an analyst in the Houston office of Banc of America Securities.

Other sources estimated as much as 1.5 million b/d of refining capacity may have been shut down by the storm just a week before the US Labor Day holiday that marks the official end of the peak summer driving season. Moreover, the Louisiana Offshore Oil Port, which takes in 11% of crude imports into the US, suspended marine operations at midday Aug. 27, although it was still making pipeline deliveries at that point.

"A much larger-than-anticipated drop in US gasoline inventories despite a larger-than-expected build in crude stocks helped buoy oil prices last week. An added concern could become that with the disruption to gulf production and refinery operations that US gasoline inventories might drop to below the critical 15 days on demand coverage," said Robert S. Morris, Banc of America Securities, New York.

Six major refineries with a combined crude processing capacity of 1.7 million b/d are located along the Mississippi River between Baton Rouge and New Orleans. "These refineries produce 775,000 b/d of motor gasoline and 440,000 b/d of distillate fuel oil. Refineries in Louisiana are a primary source of supply for the daily shipment of motor gasoline to the East Coast markets," said analysts at Petral Consulting Co., Houston.

Louisiana also has 30 major gas plants with a combined capacity of 18 bcfd. Damage to the electric power grid (generating plants, transmission lines, and substations) "is the most important source of damage to consider in evaluation of the impact of Hurricane Katrina. Refineries, ethylene plants, raw mix fractionators, and many gas plants cannot operate without electric power. Undoubtedly, repairs to the electric power systems in southeast Louisiana will have high priority, but repairs after a major storm may take a week or two to complete," analysts said. Damage to the power grid may mean that refinery production will be disrupted "for as little as a few days or as long as a week or two," they said.

Prices rebound
The October contract for benchmark US light, sweet crude plummeted by $1.36 to $66.13/bbl Aug. 26, only to jump to a record $70.80/bbl in overnight electronic trading Aug. 29 on the New York Mercantile Exchange—the biggest one-time gain for a front-month contract in 29 months. The November contract fell by $1.30 to $66.89/bbl on Aug. 26 but was trading as high as $71.15/bbl by the morning of Aug. 29. West Texas Intermediate at Cushing, Okla., lost $1.16 to $66.14/bbl on the US spot market on Aug. 26, but no update was available.

Heating oil for September delivery dropped 3.9¢ to $1.84/gal on Aug. 26 but was up to $2.01/gal in the early Aug. 29 session. Gasoline for the same month first fell by 3.68¢ to $1.93/gal but recovered to a record high of $2.16/gal in the same two sessions.

The September natural gas contract increased by 2.2¢ to $9.79/MMbtu on Aug. 26, "propped up by a firm cash [spot] market and pre-weekend short-covering [of exposed sales contracts] and concerns that Hurricane Katrina could veer west and disrupt offshore natural gas production," said analysts at Enerfax Daily. It escalated as high as $12.07/MMbtu in early trade on Aug. 29.

"Given that the entire offshore Gulf of Mexico accounts for just under one-quarter of total US natural gas supply, the prospect of Katrina interrupting just a portion of this output provided an even greater uplift to natural gas prices relative to oil prices. However, we believe that the markets did not fully anticipate the prospect of Katrina making landfall further west of the Florida panhandle at the markets' close on Friday and consequently natural gas prices are likely to surge even higher starting out this week," Morris said.

On the Singapore futures market Aug. 29, crude prices for the first time escalated to more than $70 a barrel in overnight trading.

In London, the October contract for North Sea Brent crude fell by $1.40 to $64.87/bbl on Aug. 26. Gas oil for September lost $2 to $595.50/tonne at the end of last week.

The average price for the Organization of Petroleum Exporting Countries' basket of 11 benchmark crudes inched up by 1¢ to $59.76/bbl on Aug. 26. So far this year, OPEC's basket price has averaged $48.69/bbl.

Contact Sam Fletcher at samf@ogjonline.com

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