MARKET WATCH: Crude prices fall as Ike threatens Houston area

Sam Fletcher
Senior Writer

HOUSTON, Sept. 12 -- Despite pending supply reductions via the Organization of Petroleum Exporting Countries and Hurricane Ike, energy prices continued falling to yet another 5-month low just over $100/bbl Sept. 11 as traders focused on declining demand.

"Technically, West Texas Intermediate continued in its negative trend channel and started to test the $100/bbl level," said Olivier Jakob at Petromatrix, Zug, Switzerland.

In New Orleans, however, analysts at Pritchard Capital Partners LLC reported crude prices above $102/bbl in early trading Sept. 12, "getting a lift from physical cash 'cracks' for gasoline that are in the realm of $75/bbl or more." Refined products futures also were up sharply "in reaction to the shutdown of something in the neighborhood of 3 million b/d of refinery capacity in anticipation of Hurricane Ike," they said. "There is not much downside in paying $102/bbl against the backdrop of a market that will pay much more for the finished products. We expect cash trading to be very thin at the Gulf Coast today because of the evacuations in and around Houston."

With the storm just hours away from an expected post-midnight landfall near the concentration of refineries in the Houston-Galveston area, Jakob said, "We would expect to see increased volatility towards the end of the [Sept. 12] session. The dollar index has weakened quite largely overnight and shares some responsibility in the crude oil support during the European morning hours. Gasoline will lead the show, but we are in spike trading where reversal can be very sharp and fast."

At 10 a.m. central daylight time Sept. 12 Ike was 195 miles southeast of Galveston, moving west-northwest at 12 mph with maximum sustained winds of 105 mph, a Category 2 storm. It is larger geographically than Hurricane Katrina in 2005, with hurricane-force winds extending 120 miles from its center and tropical-storm force winds reaching out even farther. It could bring a storm surge of up to 25 feet and might be the worst storm to hit the Texas coast since Hurricane Carla came ashore near Corpus Christi in 1961. Meteorologists warn that all of the western Gulf Coast is likely to be impacted in some fashion by the storm. Hurricane warnings were issued from Baffin Bay, Tex., to Morgan City, La., with tropical storm warnings extending further east to the Mississippi-Alabama border.

"The Ike risk remains potentially more bullish [for] the product cracks than the flat price of crude oil. The precautionary shut down of refineries is drawing on product stocks and is priced through the jump in the gasoline crack and backwardation," said Jakob. "However with the US refineries running at lower than usual capacity due to low demand and the potential for an International Energy Administration stock release, the products are currently under spike dynamics rather than a structural long lasting shift."

The US Minerals Management Service reported 562 of the 717 manned platforms and 93 of the 121 mobile rigs operating in the US sector of the Gulf of Mexico were evacuated as of mid-day Sept. 11. Officials said 96.9% of the oil and 93.3% of the natural gas usually produced from offshore federal leases have been shut in. That includes workers who were evacuated and production that was shut in prior to Hurricane Gustav earlier this month and not yet reactivated.

In Louisiana, authorities issued a mandatory evacuation notice for all of Vermillion Parish south of Highway 14, which includes the physical location of the Henry Hub, the benchmark trading point for natural gas on the New York Mercantile Exchange.

The Department of Energy earlier reported eight refineries with combined capacities of 2.5 million b/d were shutting down ahead of Ike, while ConocoPhillips's 247,000 b/d Belle Chase, La., remained shut down since Hurricane Gustav. Shell Oil Co. was doing a controlled shutdown of its Deer Park, Tex., refinery and chemical plant outside of Houston; Motiva Enterprises LLC (a Shell-Saudi Aramco joint venture) also began a controlled shutdown of its Port Arthur, Tex., refinery. Valero Energy Corp. decided to shut its 325,000 b/d Port Arthur refinery as it concluded the shutdown process at its 245,000 b/d Texas City refinery and 130,000 b/d Houston refinery. Valero's other Gulf Coast refineries are operating at planned rates.

Seven natural gas processing plants with total capacity of 2.29 bcfd also were shutting down. As of Sept. 11, 3.8% of Louisiana remained without electric power as a result of Gustav. Because of supply disruptions caused by Gustav, the DOE said it will provide 250,000 bbl of crude from the Strategic Petroleum Reserve to Midwest refineries operated by Marathon Petroleum and an additional 130,000 bbl to Placid Oil's Port Allen, La., refinery.

Energy prices
The October contract of benchmark US light, sweet crudes slipped to $100.10 in intraday trading Sept. 11, the lowest level since April, before closing at $100.87, up $1.71 for the day on NYMEX. The November contract lost $1.69 to $100.93/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down $1.71 to $100.87/bbl. Heating oil for October delivery was up 1.31¢ to $2.92/gal on NYMEX. The October contract for reformulated blend stock for oxygenate blending (RBOB) escalated by 8.72¢ to $2.59/gal.

The October natural gas contract lost 14.5¢ to $7.25/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub jumped by 15¢ to $7.82/MMbtu.

In London, the October IPE contract for North Sea Brent fell $1.33 to $97.64/bbl. The September contract for gas oil was unchanged at $921/tonne.

Despite OPEC's Sept. 10 decision for a de facto reduction of some 530,000 b/d of overproduction by complying "strictly" with its 28.8 million b/d production quota of 28.8 million b/d, the average price for its basket of 13 benchmark crudes lost $1.51 to $95.29/bbl on Sept. 11.

Contact Sam Fletcher at samf@ogjonline.com.

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