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MARKET WATCH: Energy prices rise as Gustav threatens gulf

Sam Fletcher
Senior Writer

HOUSTON, Aug. 28 -- Energy prices continued to rise Aug. 27 as slow-moving Tropical Storm Gustav approached Jamaica apparently in route to a US Gulf Coast landfall early next week through the bulk of US offshore oil and gas operations.

"Gustav is sweeping towards the Gulf of Mexico and temporarily saving the energy market in the process," said analysts in the Houston office of Raymond James & Associates Inc. "The threat of damaged infrastructure has both energy commodities and stocks in the green [of increased prices], reversing a 2-month trend. Investors even shrugged off a slightly bearish Department of Energy [US inventory] report [Aug. 27], and both crude and natural gas are up again this morning."

Raymond James analysts reported, "Most forecasts still predict the storm strengthens to at least a Category 3 hurricane, with the potential to reach Category 4 or 5 status. Most models predict the storm follows a path through the middle of the energy corridor, with a landfall between Houston and New Orleans sometime next Tuesday."

In New Orleans, analysts at Pritchard Capital Partners LLC said, "One weather service estimates that as much as 80% of the gulf's oil and gas infrastructure could be affected by the storm." Meanwhile, the eighth tropical disturbance of the 2008 Atlantic hurricane season has upgraded into the seventh named tropical storm, Hanna, northeast of the Lesser Antilles.

Based on predictions that Gustav will again strengthen into a hurricane, Shell Oil Co. said it will evacuate 300 workers from its gulf operations Aug. 28, in addition to the 400 evacuated Aug. 27. A spokesman said, "We expect to evacuate the remaining 600 personnel" Aug. 29-30. Meanwhile, it has begun procedures to shut in production from subsea wells and other facilities requiring long lead times to shut down properly.

Shell also took the unusual step of urging motorists to fill the fuel tanks of their vehicles well in advance of the storm. "We typically see the most significant increases in fuel purchases less than 24 hr before a hurricane is set to make landfall. This last minute surge in fuel purchases can cause temporary and sporadic outages, so we encourage our employees and our customers to fill up early and often," said David Sexton, president of Shell Oil Products US. "To help better manage fuel demand in your area, fill your tank up when a Hurricane Watch is announced, typically 36 hr prior to landfall. Early fill ups help us better understand demand and allow us to replenish stations before the storm hits."

The Texas Fuel Emergency Operations Center encourages the public to maintain half-full tanks during the hurricane season and advises drivers to keep tanks full when a storm has entered the gulf.

Valero Energy Corp. said it is securing emergency equipment and supplies "for all our Gulf Coast refineries" and issued alerts for plants from Houston to St. Charles, La., focusing specifically on its 250,000 b/d St. Charles refinery and its 325,000 b/d Port Arthur, Tex., refinery.

Analysts at Friedman, Billings, Ramsey & Co. Inc. (FBR), Arlington, Va., noted the threat of Gustav comes just "as New Orleans prepares to commemorate the third anniversary of Hurricane Katrina" on Aug. 29, triggering talk of perhaps another evacuation of that city. Observers are calling Gustav "the most dangerous storm of the season," the "first major storm threat to US refinery operations in 3 years," and a potential "rival" to Hurricanes Katrina and Rita in 2005.

"Like Katrina and Rita, Gustav poses twin threats to the energy complex: disruption of oil and gas production and damage to, or interruption of, refining capacity. Although few energy policy actions are likely in the heat of election partisanship, a destructive hurricane that impairs US refining capacity could lead to Congressional action on energy policy," FBR analysts said.

Pritchard Capital analysts said, "Gustav has exerted total control over oil prices over the last several days, causing prices that had been dropping to reverse course and turn higher. Prices are up again in the overnight session." They reported, "Since [Aug. 25], the front-month contract for reformulated blend stock for oxygenate blending (RBOB) has gained more than 20¢/gal, setting the tables for retail gasoline prices to churn back higher."

Even with higher prices, fuel marketers are taking their contract volumes. "They don't want to get caught short of product if facilities are damaged on the Gulf Coast. Back in 2005 when Katrina hit oil prices spiked to record levels, and it took about 6 weeks for the market to start to calm down," said Pritchard Capital. US oil companies in 2005 used their overseas facilities to help bring barrels into the U.S. to augment supply lost to Katrina.

Olivier Jakob at Petromatrix, Zug, Switzerland, said, "Oil markets are waiting for Gustav and as well waiting to go on holidays, hence this continues to be a weather market in thin trading volume."

Jakob said, "During the second quarter the net US imports of crude oil and petroleum products were 1.2 million b/d lower than in the second quarter of 2007. While net imports of crude oil were down 290,000 b/d, most of the drop came from a sharp reduction in net imports of petroleum products (down 940,000 b/d). A structural change in the net imports of distillates is the main component of the drop in level of net product imports. The US has started to turn in a net exporter rather than net importer of distillates in September of last year, and the trend has increased during the first half of the year. Net exports of distillates were in June, and by far, at an all time high (the data goes as far back as 1945)."

Jacques H. Rousseau, an analyst at Soleil-Back Bay Research, noted, "Refining stocks rose 7% on average yesterday, due, in our view, to concerns that Tropical Storm Gustav could hit the Gulf of Mexico and shut down a number of refineries in Texas and Louisiana. While the loss of a material amount of refining capacity should increase margins in the near term, given that falling demand and rising supply in 2008 have created spare refining capacity, the loss would need to be substantial in order to have a material impact on refiner stock prices, in our view." He said, "If there are no supply disruptions, we expect all refining stocks to give back their recent gains due to our expectations for weak supply-demand fundamentals in September."

Energy prices
The October contract for benchmark US sweet, light crudes climbed $1.88 to $118.15/bbl Aug. 27 on the New York Mercantile Exchange. The November contract increased $1.74 to $118.44/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up $1.88 to $118.65/bbl. Heating oil for September advanced 5.18¢ to $3.26/gal on NYMEX. RBOB for the same month was up 9.75¢ to $3.07/gal.

The expiring September natural gas contract bumped up 11.6¢ to $8.39/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., it escalated by 43.5¢ to $8.47/MMbtu. Raymond James analysts said, "On the natural gas side, we think the rally will be short lived. The storm should not be a meaningful threat to our bearish outlook for gas prices next year."

Furthermore, they said, "If the disaster scenario occurs (repeat of the damage from the 2004-05 storms), we could see permanent shut-ins to the tune of 1 bcfd, or 300-400 bcf of lost supply annually. Even then, we still see an oversupplied gas market by summer-end 2009, and that is before assuming any demand destruction that would likely accompany a monster storm. If the disaster scenario occurs, we do not think Gustav saves gas prices long term, but merely postpones natural gas weakness. Short term, natural gas prices stay high as long as it is a threat."

In London, the October IPE contract for North Sea Brent crude gained $1.59 to $116.22/bbl. Gas oil for September continued climbing, up $6.75 to $1,041.50/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 13 reference crudes increased by $1.28 to $111.79/bbl on Aug. 27.

Contact Sam Fletcher at samf@ogjonline.com.


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