MARKET WATCH: Crude prices continue to explore new highs

Sam Fletcher
Senior Writer

HOUSTON, Sept. 20 -- The front-month crude futures contract climbed to new highs in the New York market Sept. 19 as US inventories continued to fall amid expectations that the interest rate cut by the Federal Reserve will boost energy demand.

The Fed cut its target interest rate by a larger-than-expected half of a percentage point to 4.75% this week to stem a possible slowdown in the US economy (OGJ Online, Sept. 19, 2007).

The Energy Information Administration reported commercial US crude inventories fell by 3.8 million bbl to 318.8 million bbl during the week ended Sept. 14. That was the 10th decline in crude stocks in 11 weeks. Although refinery utilization fell to 89.6% of capacity from 90.5% the previous week, gasoline stocks inched up by 400,000 bbl to 190.8 million bbl—still well below average. Distillate fuel inventories increased by 1.5 million bbl to 135.5 million bbl.

US refinery capacity was affected when three refineries in Port Arthur, Tex., lost power Sept. 13 as Hurricane Humberto hit the US Gulf Coast. Valero Energy Corp. said Sept. 19 its 250,000 b/d refinery's main processing units are operating and production has begun at reduced rates. "We expect the refinery to be at planned rates within several days," a company spokesman told OGJ Online.

Shell Oil Co. earlier said workers began the restart sequence after restoring power to most of Motiva Enterprises LLC's 285,000 b/d refinery. Total SA reported partial power was quickly restored to Total Petrochemicals USA's 231,252 b/d refinery (OGJ Online, Sept. 17, 2007).

Storm watch
The National Hurricane Center was sending out hurricane reconnaissance aircraft Sept. 20 to monitor a low-level low pressure system off the west coast of Fort Myers, Fla. "The system has the potential to turn into a tropical storm and further develop into a hurricane as early as this weekend," said analysts in the Houston office of Raymond James & Associates Inc.

The Minerals Management Service reported offshore oil and gas operators were evacuating platforms and rigs in the path of the potential storm. On Sept. 19 officials said 1 of the 834 manned platforms in US waters of the Gulf of Mexico had been evacuated, along with 1 of the 89 mobile rigs. Officials said no oil and gas production had yet been shut in.

Shell Oil Co. said it evacuated 600 workers from its offshore facilities Sept. 19, in addition to 300 removed Sept. 18. The company said Sept. 20 it had less than 400 workers still offshore and planned to evacuate them by the end of day. "The North Padre Island block 969 and West Cameron block 565 platforms have been fully evacuated. All remaining Shell operated production platforms have reduced crews to minimal levels to maintain production and those platforms will complete shut-in today and be fully evacuated. Shell operated production in the Gulf of Mexico is approximately 370,000 b/d of oil equivalent," said a company spokesman.

Hurricane Humberto's surprisingly rapid development earlier this month prompted some speculation that offshore producers would start earlier to bring workers ashore ahead of the next storm. However, a Shell representative told OGJ the current evacuation "is no earlier than we would initiate safe and orderly evacuations for a weather system under these conditions." She said, "While it is not a tropical storm or more at this point, you can't rule out the chance that it might develop, especially once in the gulf, and if we waited until that point to begin evacuations, it would strain lead time for safe and orderly evacuations and getting people out of potential harm's way."

If the current weather system develops into a tropical storm, several computer forecast models indicate it would move north-northwest across the northeast Gulf of Mexico, bringing heavy rain and gusty winds to the central Gulf Coast over the weekend. "While such a track would leave natural gas fields less exposed [to damage and disruption], there are still some refinery assets in Mississippi (Pascagoula), so we will not yet discount this weather risk for products. Furthermore, the calculated path and strength forecast will still undergo some changes as the front moves into the eastern US Gulf waters," said Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland.

In other news, Barclays Capital Inc. analyst Paul Horsnell in London said, "International tensions surrounding Iran appear to be in the process of stepping up, with diplomacy moving further away from the carrot and closer to the stick." He sees 2008 "as the year of maximum danger, although it does not appear that the core issues themselves, or the core dangers in the situation, would necessarily change following the change of US administration."

Horsnell said, "We are placing a partial allowance for the worst of any Iranian-linked tension in the second half of 2008, having nudged our 2008 West Texas Intermediate price forecast up to $77/bbl from the previous forecast of $73.90/bbl."

Energy prices
The October contract for benchmark US light, sweet crudes climbed to a record high of $82.51/bbl in intraday trade Sept. 19 on the New York Mercantile Exchange, prior to its record closing of $81.93/bbl, up 42¢ for the day. The November contract gained 62¢ to $80.85/bbl. On the US spot market, WTI at Cushing, Okla., was up 42¢ to $81.94/bbl. Midwest crude inventories at Cushing are now at the lowest level since December 2005, said Horsnell.

Heating oil for October delivery inched up 0.3¢ to $2.25/gal on NYMEX. The October contract for reformulated blendstock for oxygenate blending (RBOB) rose by 3.31¢ to $2.09/gal. Jakob said, "The refinery 3-2-1 margin has improved as heating oil has given up some of its premium to RBOB."

The October natural gas contract fell 38.8¢ to $6.18/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., lost 7¢ to $6.28/MMbtu. Raymond James analysts said, "It continues to be our view, barring any prolonged shut-in activity in the gulf and heading into the end of injection season, that natural gas prices will need to continue to fall to spur a decrease in both US production and LNG imports or we will reach full storage this year."

EIA reported Sept. 20 the injection of 63 bcf of natural gas into US underground storage in the week ended Sept. 17. That compared with injections of 64 bcf the prior week and 93 bcf in the same period a year ago. US gas storage now exceeds 3.1 tcf, down 32 bcf from last year but 238 bcf above the 5-year average.

In London, the November IPE contract for North Sea Brent crude gained 88¢ to $78.47/bbl. Gas oil for October increased $6.75 to $704.25/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 11 benchmark crudes was up 69¢ to $75.61/bbl on Sept. 19.

Contact Sam Fletcher at samf@ogjonline.com.

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