MARKET WATCH
Natural gas, gasoline futures prices climb

Sam Fletcher
Senior Writer

HOUSTON, Sept. 28 -- Crude prices slipped, but gasoline and natural gas futures prices continued to climb Sept. 27 on traders' expectations that the next US inventory report would show declines across the board because of production and refinery shutdowns caused by two Gulf Coast hurricanes in less than a month.

Commercial US crude inventories, excluding those in the Strategic Petroleum Reserve, dropped by 2.4 million bbl to 305.7 million bbl in the week ended Sept. 23, the Energy Information Administration reported Sept. 28. However, it said gasoline stocks jumped by 4.4 million bbl to 199.8 million bbl, while distillate fuels dipped by 500,000 bbl to 133.6 million bbl with a drop in heating oil.

Input of crude into US refineries fell by 709,000 b/d to 14.6 million b/d during that period as many units shut down in preparation for Hurricane Rita. With refineries operating at 86.7% of capacity, US production of both gasoline and distillates declined. Imports of crude into the US diminished by 139,000 b/d to 9.5 million b/d because of the storm.

Coastal demand doubles
Nevertheless, researchers at Rice University's Baker Institute for Public Policy said demand for gasoline in the Houston area doubled last week during the massive evacuation of Texas and Louisiana residents ahead of the storm.

"For this time of year, normal consumption of gasoline in Houston and the surrounding area is about 22 million gal/day. For the days leading up to Hurricane Rita's Sept. 24 landfall, the evacuation of some 3 million people pushed gasoline demand to an estimated 45 million gal/day," the researchers reported Sept. 28. "All else being equal, this increased demand would push national consumption of gasoline during that period to levels comparable to those for the traditionally heavy-driving week of Labor Day, or about 10% higher than usual for this time of year."

The extra demand triggered by Rita will put additional strain on US gasoline distribution in coming weeks and push up retail prices, the researchers predicted. But fears that the national average pump price will exceed $5/gal "might be largely overstated," they said.

The historical relationship between benchmark West Texas Intermediate and average US pump prices indicates that the current national average retail price of $2.80/gal for gasoline is in line with crude prices of $75/bbl, making a spike to $5/gal unlikely, the Rice researchers said.

Shell Oil Products US and Motiva Enterprises LLC reopened their Beaumont Terminal on Sept. 27. With three terminals now open, the companies reported that 70% of Shell-branded stations in the Houston area have gasoline and that the number would increase "hourly." Company officials said more than 581 tanker loads equaling 5.2 million gal of fuel have been shipped to strategic station locations in Houston and along refugee return routes as of Sept. 27.

Assessing storm damage
Meanwhile, the oil and natural gas industry has been busy this week assessing storm damage to offshore and coastal facilities. The US Minerals Management Service said 683 platforms and 87 rigs remained evacuated in the Gulf of Mexico on Sept. 27. Shut-in production totaled 1.5 million b/d of crude and 7.9 bcfd of natural gas. That's equivalent to virtually all the oil and 78.6% of the natural gas normally produced from those waters, said MMS. Since Aug. 26, when Katrina threatened offshore production, the cumulative production lost as the result of the two hurricanes now totals 36.4 million bbl of crude and 172.5 bcf of gas.

"The good news is that Rita seems to have missed any vital organs. The bad news is that Rita disrupted the recovery that was going on from Katrina," said David Wyss, chief economist at Standard & Poor's, the investment research unit of McGraw-Hill Cos., in a Sept. 28 telephone conference.

S&P expects all refineries knocked out by either of the two hurricanes to be back on line by yearend. The impact on Gulf Coast crude production is less important because the US can make up that loss through imports and SPR supplies, said Wyss.

Like many in the industry, however, Wyss is primarily concerned about offshore pipelines and natural gas production. "The real question is whether there is damage to the undersea pipelines," he said. That was a major problem after Hurricane Ivan hit the Gulf of Mexico in 2004.

US natural gas supplies should be "okay" for a mild winter, although consumers could pay 50% more for natural gas in December than for the same month last year, Wyss said. However, he said, "If we have a really bad winter, well, it could get pretty cold inside the house as well."

More than a dozen Gulf Coast gas-processing plants are offline because of flooding, lack of supplies, inability to move stored liquids, or safety precautions, DOE officials said. With most Gulf Coast gas production and processing shut down, most natural gas pipelines in the affected areas are running with losses of supply going into their systems.

Tennessee Gas Pipeline reported supply losses of 900 MMcfd, not including 650 MMcfd still shut in as a result of Hurricane Katrina. The company confirmed to the Department of Energy a leak on its 524G-100 line from Bay Marchand to Leeville, La. Inspections of the Grand Chenier area revealed moderate damage to the Starks, La., compressor at Station 820 and the Johnson Bayou Dehydration Plant, officials said.

Sixteen US refineries were shut down in preparation for Hurricane Rita. On Sept. 27, DOE said eight of those facilities had restarted or were attempting to restart. "All of the refineries that remain offline following Hurricane Rita are located in the Port Arthur or Lake Charles refining centers, with the exception of one refinery in Texas City," DOE said.

Those refineries in Port Arthur or Lake Charles "are either expected to remain shut down for at least 2 weeks or else it is unclear when they will restart," DOE said. "In addition to the four refineries that remain shut down following Hurricane Katrina, the total amount of refinery capacity completely shut down amounts to more than 2 million b/d. This accounts for well more than 1 million b/d of gasoline, about 800,000 b/d of distillate fuel, and over 300,000 b/d of jet fuel that is not being produced as long as these refineries remain shut down."

Excel Paralubes Funding Corp.'s 220,000 b/d base oil refinery in Lake Charles sustained minimal structural damage with storm-related flooding only in the loading docks. The extent of damage will be known only when floodwaters recede, officials said. Meanwhile, the major concern now is the lack of electric power in the area. It has been estimated that power may not be restored for 2-3 weeks.

Shell Oil Co. reported the restoration of utilities is nearly completed at the Shell Deer Park refinery and chemical plant, which will be followed by the start-up of process units.

"We are transporting by pipelines diesel fuel and jet fuel from inventory and are prepared to ship inventoried gasoline as required by our customers," Shell representatives said. "Today, we will begin blending gasoline components from pre-Rita inventory to further help meet product demand. With the partial reopening of the Houston Ship Channel, we have a crude oil vessel at our dock."

Sabine Pipeline, operator of the Henry Hub, La., gas collection point, is continuing its force majeure until further notice since power remains out in most areas of its system. As a result, the New York Mercantile Exchange declared force majeure for deliveries under the September contract for the rest of the month. NYMEX is giving traders the ability to mutually agree to execute an alternative delivery procedure.

GlobalSantaFe Corp. located its two missing jack up rigs, the GSF Adriatic VII and GSF High Island III, in shallow waters off Louisiana, some 80 miles from their drilling sites. The rigs appeared to have sustained severe damage, officials said.

Grey Wolf Inc. said workers have not been able to return to three of its rigs in Cameron and Vermillion Parishes in southern Louisiana because of flooding. However, the rigs have been viewed from the air and appear intact.

Energy prices
The November contract for benchmark US light, sweet crudes fell by 75¢ to $65.07/bbl Sept. 27 on NYMEX. The December position lost 68¢ to $65.35/bbl. On the US spot market, WTI was down by 76¢ to $65.07/bbl. The October natural gas contract jumped by 21.6¢ to $12.66/MMbtu on NYMEX. Heating oil for October delivery gained 1¢ to $2.07/gal. Gasoline for the same month increased by 3.72¢ to $2.17/gal.

In London, the November contract for North Sea Brent crude declined by 96¢ to $62.97/bbl on the International Petroleum Exchange. But gas oil for October gained $17 to $621.75/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 11 benchmark crudes increased by 79¢ to $57.70/bbl on Sept. 27.

Contact Sam Fletcher at samf@ogjonline.com.

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