On Aug. 29, just 3 years to the day after Hurricane Katrina came ashore in Louisiana and devastated New Orleans, Tropical Storm Gustav was over open waters of the Caribbean and predicted to intensify into a hurricane and make landfall west of that same city, possibly Labor Day, Sept. 1.
Although downgraded from a Category 1 hurricane by its passage over Haiti, Gustav remained the most menacing storm and first major threat to US offshore and Gulf Coast refining since 2005, pushing up energy prices Aug. 26-27 and reversing a 2-month downward trend. Yet the October natural gas contract led a drop in energy prices Aug. 28 in New York as a bigger-than-expected injection of gas into US underground storage grabbed traders' attention.
The Energy Information Administration reported injection of 102 bcf of gas into US underground storage in the week ended Aug. 22. That put gas storage near 2.7 tcf, 200 bcf less than in the same period a year ago but 71 bcf above the 5-year average. In New Orleans, analysts at Pritchard Capital Partners LLC said, "Even with Tropical Storm Gustav's path likely targeting oil and gas infrastructure in the Gulf of Mexico, not to mention the 2-3 other [pressure] systems that are forming behind it, traders were unable to ignore such a large injection this late in the summer."
With benchmark US crudes only $1/bbl higher Aug. 28 than the Aug. 22 close on NYMEX, there had been "so far a very limited premium for Gustav," said Olivier Jakob at Petromatrix, Zug, Switzerland. "While the destructive potential of Gustav cannot be ignored, the current state of demand destruction makes it more difficult than in previous years to adequately price a premium for that potential."
He said, "In 2005 when Katrina hit the US Gulf, US refineries were running at 97% of capacity; today they are at 87%." With US demand 1.6 million b/d lower than when Katrina struck, the country is less exposed to the potential destructive impact of a hurricane. "However, we must also recognize that volatility and speculative sensitivity is higher today than in 2005; hence we are not ready to ignore the price impact that Gustav could have," Jakob said.
Paul Horsnell, Barclays Capital Inc., London, predicted Gustav would be "fairly critical" in "setting the tone of the market" through early September and "also plays into the dynamics" of the scheduled Sept. 9 meeting of the Organization of Petroleum Exporting Countries.
Meanwhile, an EIA report Aug. 26 revised downward US oil demand, dropping June demand by 793,000 b/d to 19.55 million b/d, "the lowest June reading since 1998 and [representing] a year-over-year decline of 1.17 million b/d (5.6%)," said Horsnell.
Jakob said, "Gasoline sales in June were 4.4% lower than a year ago, and sales of middle distillates were down an impressive 9.4%." He said, "Looking at the demand of main products (excluding LPG), not only is demand continuously lower than previous years but has been dropping from April to June while it usually seasonally does the opposite. The US might be dependent on foreign crude oil to run its refineries, but the same refineries have now turned fully dependent on exports to maintain their operating margins."
The Russian factor
Of "longer-term importance" than the potential impact of Gustav are that the "changes in Russia's external political relations has created barely a ripple [in world markets] nor has the new fog around Caspian energy development or Russia's external energy relations attracted much more than a glance," Horsnell said.
"Likewise, some striking (or at least fog generating), fundamental data on both the supply and demand side has emerged without getting much more than minimal attention,"Horsnell added.
In the week ended Aug. 29, China joined the US and other Western nations in opposing Russia's formal recognition of Abkhazia and South Ossetia as independent states, a move that would redraw the borders of Georgia. Horsnell said, "The recasting of relations between Russia and the US in recent weeks, and the question marks put on the pace of Caspian development and its reliability following pipeline attacks in Turkey and the Georgian conflict represent a set of issues that are likely to take a while to fully play out. They are, however, significant as drivers of the eventual shape of the oil market.
"A significant portion of consensus outlooks for non-OPEC supply in coming years still rests on Russia and the Caspian. Indeed, those areas have been central in many outlooks in the short run as well," said Horsnell.
(Online Sept. 1, 2008; author's e-mail: firstname.lastname@example.org)