MARKET WATCH: Energy prices inch up as Hurricane Ike approaches

Sam Fletcher
Senior Writer

HOUSTON, Sept. 9 -- Energy prices inched higher Sept. 8 as Hurricane Ike washed over eastern and central Cuba, diminishing from a Category 3 storm to a Category 1 storm in the process.

The storm continued over western Cuba on Sept. 9 on its way to the deep, warm waters of the Gulf of Mexico where it is expected to strengthen. Meteorologists expect the storm to hit northern Mexico or Texas this weekend.

Meanwhile, ministers of the Organization of Petroleum Exporting Countries are to meet the evening of Sept. 9 in Vienna, but most observers expect them to agree to little more than possibly reducing actual production back to assigned quota levels, which would amount to a "de facto cut," said analysts at Friedman, Billings, Ramsey & Co. Inc. (FBR).

OPEC's monitoring committee met Sept. 8 but did not agree on any formal recommendation to ministers. However, Olivier Jakob at Petromatrix, Zug, Switzerland, said, "With the rise of the dollar index, the fall in crude oil prices is not yet dramatic for OPEC, apart of course for Iran, which has moved with the sanctions to nondollar payment. It is therefore not a coincidence that Iran is the most vociferous about the need for a supply cut; as it is benefiting less from the dollar index kicker."

The US dollar soared to its highest level against the euro in 11 months Sept. 8 after the US Department of the Treasury decided to place the Federal Home Loan Mortgage Corp. (Freddie Mac) and the Federal National Mortgage Association (Fannie Mae) under conservatorship.

In New Orleans, Pritchard Capital Partners LLC said Sept. 9, "Oil futures weakened overnight as dollar strength and expectations that OPEC won't cut production took precedent over the potential effects of Hurricane Ike. This was not the case in the Gulf Coast spot gasoline market. Ike-inspired buying pushed spot prices up a stunning 56¢ over futures yesterday, putting the USGC unleaded crack up another $10/bbl to more than $29/bbl. That basis could quickly be replaced with higher numbers should Ike, on track to reach the southeastern Gulf of Mexico by Sept. 10, affect refining capacity and import flows."

Jakob said a "significant hurricane premium" is still embedded in the price of crude. Although crude prices didn't climb much Sept. 8 in the New York market, he said, "The dollar index has risen so sharply in recent days that without the storms, on a dollar index correlation West Texas Intermediate should be valued well below $100/bbl." Jakob said, "With Ike delaying some of the restart operations on crude oil fields and its potential threat to refineries, the cracks and time spreads have strengthened."

Pritchard Capital analysts said, "While producers and rig operators are taking all necessary precautions, some industry watchers are quick to point out that the devastating 2005 Atlantic hurricane season has left some pretty big shoes to fill. During [Hurricanes] Katrina and Rita the Gulf of Mexico producers lost over 700 bcf of production. Through Sept. 8, the cumulative loss from Gustav is 57.667 bcf."

At midday Sept. 8, the US Minerals Management Service said 200 of the 717 manned production platforms and 15 of the 121 rigs operating on federal leases in the gulf were evacuated; in most cases, that meant crews evacuated ahead of Gustav have not yet returned. MMS also reported 79.4% of the usual oil production and 64.2% of the normal natural gas production from federal leases in the gulf are shut in.

Shell Oil Co. said Sept. 9, "Current forecasts still show Ike will likely enter the Gulf of Mexico tomorrow and will cause deteriorating flying and seas conditions…. We continue to make plans to maintain production that has been reestablished since Gustav but still evacuate most or all of our Shell operated assets by [Sept. 11]." Shell said it had 240 workers offshore, down from more than 600 who had returned to worksites after Gustav passed.

Energy prices
The October contract for benchmark US benchmark sweet, light crudes traded at $104.70-109.89/bbl Sept. 8 before closing at $106.34/bbl, up just 11¢ for the day on the New York Mercantile Exchange. The November contract dipped 8¢ to $106.61/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up 11¢ to $106.34/bbl. Heating oil for October increased 3.03¢ to $3.01/gal on NYMEX. The October contract for reformulated blend stock for oxygenate blending (RBOB) advanced 6.42¢ to $2.75/gal.

Natural gas for the same month gained 7.8¢ to $7.53/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., jumped 30¢ to $7.71/MMbtu.

In London, the October IPE contract for North Sea Brent crude lost 65¢ to $103.44/bbl. Gas oil for September increased $4.75 to $958/tonne.

The average price for OPEC's basket of 13 reference crudes declined 13¢ to $101.08/bbl on Sept. 8.

Contact Sam Fletcher at samf@ogjonline.com.

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