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MARKET WATCH: Oil prices swing in hurricane winds

Sam Fletcher
Senior Writer

HOUSTON, Sept. 8 -- Crude prices dropped below $107/bbl Sept. 5 as mostly unscathed US Gulf Coast oil and gas operations come back on stream following the dissipation of Hurricane Gustav, which also reduced US demand for energy via power outages and other disruptions.

But oil prices rebounded some in early trading Sept. 8 as Hurricane Ike ripped through Cuba. The storm is expected to enter the southeastern Gulf of Mexico on Sept. 9, headed for a US Gulf Coast landing later this week. It's too soon to say where Ike may come ashore, with forecast models extend from the south-central Texas coast all the way to the Florida panhandle.

"New uncertainty has entered the market with Hurricane Ike heading toward the gulf and [leaders of the Organization of Petroleum Exporting countries] gathering in Vienna" on Sept. 9, said analysts in the Houston office of Raymond James & Associates Inc. "OPEC's main objective will be to review oil output targets, and the outcome remains unclear at this point. Iran's minister made a comment that oil is over-supplied, while Ecuador's minister said he did not believe that production levels would change."

In New Orleans, analysts at Pritchard Capital Partners LLC, said, "Ike's landfall in the region would further snarl tightly tangled supply in the wake of Hurricane Gustav." They said, "Widespread outages of product and relatively low flow were reported throughout southeastern and Gulf markets. Dislocations were particularly noted in Florida. On Friday, Gulf Coast spot gasoline sellers reappeared after hiding most of the week as refiners assessed damage and began restart procedures. But another hurricane could thwart those efforts." They said cash market activity was liable to be volatile Sept. 8 "as Gulf Coast refiners scramble to get back up and running after Gustav and turn their attentions to Ike's approach," said Pritchard Capital Partners.

The US Minerals Management Service said Sept. 7 that oil and gas operators' employees still in the process of reboarding platforms and rigs and restoring production following Hurricane Gustav had begun taking precautions against Hurricane Ike. As of midday Sept. 7, 202 of the 717 production platforms and 10 of the 121 mobile offshore rigs in the Gulf of Mexico were still without crews. On federal offshore leases, 79.8% of the 1.3 million b/d of the average oil production and 70% of the average 7.4 bcfd of natural gas production remained shut-in.

Shell Oil Co. said Sept. 6 that 615 of its 1,400 offshore workers evacuated ahead of Gustav had returned to work in the Gulf of Mexico. However, the company said it would not redeploy the rest "because of the possibility that Hurricane Ike might enter the Gulf of Mexico and require another evacuation." On Sept. 7, Shell brought 150 workers ashore. Meanwhile, a small amount of production from Shell-operated properties is back on stream and production ramp-up procedures at most Shell facilities are expected this week.

In what the company said would be its last update on refining and chemical operations relative to Gustav, Shell and Motiva Enterprises LLC (a Shell-Saudi Aramco joint venture) said Motiva's Norco, La., refinery is increasing production back to normal. They said other Shell and Motiva Gulf Coast sites have power and are in the process of returning to normal operation.

Valero Energy Corp. said the main process units at its St. Charles, La., refinery were restarted over the weekend after being shut down for a week in anticipation of Gustav. The refinery is gradually returning to planned rates. Other refineries in Texas in Houston, Texas City, and Port Arthur, previously operating at reduced rates, have returned to planned rates. "The Memphis refinery, which was at reduced rates due to the hurricane-related pipeline closures, received a delivery of crude oil this weekend and has increased its production rates," the company reported.

Analysts at Friedman, Billings, Ramsey & Co. Inc. (FBR), Arlington, Va., noted a Department of Energy report that six refineries remain shut down, representing 922,000 b/d of refining capacity, while another 13 refineries with a combined designed capacity of 3.62 million b/d are restarting or operating at reduced runs. As of Sept. 7, 17.6% of Louisiana remained without power.

"Further impending hurricanes may postpone a quick test of $100/bbl crude and limit pressure on OPEC to reduce output," said analysts at KBC Market Services, a division of KBC Process Technology Ltd. in the UK. "We do not expect Saudi Arabia to take preemptive steps to keep prices above this threshold. But OPEC knows that it must reduce supplies at some point in the coming months, and any return to double digit crude prices may be of short duration."

The average price of OPEC's basket of 13 benchmark crudes fell $2.43 to $101.21/bbl on Sept. 5. So far this year, OPEC's basket price has averaged $109.40/bbl. According to FBR analysts, OPEC could quietly reduce production without adjusting quotas simply by adhering to its current production quota of 29.67 million b/d. The International Energy Agency earlier estimated OPEC's actual in July was 32.77 million b/d.

In other news, Nigerian gunmen killed a crew member and abducted another aboard the Fulmar Lamnco supply vessel operated by the local unit of Eni SPA in the Niger Delta region.

Meanwhile, several Russian ships and 1,000 soldiers will take part in joint naval maneuvers with Venezuela in the Caribbean later this year, a pro-government Venezuelan newspaper Vea reported. It said four Russian vessels would visit Venezuelan waters Nov. 10-14. It would mark the first time the Russian navy did such an exercise in Latin American waters. It comes at a time of heightened diplomatic tension and Cold War-style rhetoric between Moscow and the US over the recent war in Georgia and plans for a US missile defense system in the Czech Republic and Poland.

Venezuelan President Hugo Chavez earlier said Russian ships and "long-distance" planes are welcome to visit his country. Chavez also has criticized the recent reactivation of the US Navy's Fourth Fleet, which will patrol Latin America for the first time in more than 50 years.

Energy prices
The October contract of benchmark US light, sweet crudes fell as low as $105.13/bbl Sept. 5, before closing at $106.23/bbl, down $1.66 for the day on the New York Mercantile Exchange. The November contract lost $1.75 to $106.69/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down $1.66 to $106.23/bbl. Heating oil for October delivery dropped 4.09¢ to $2.98/gal on NYMEX. The October contract for reformulated blend stock for oxygenate blending (RBOB) fell 5.43¢ to $2.69/gal.

But the October natural gas contract advanced 12.7¢ to $7.45/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., gained 15.5¢ to $6.41/MMbtu. Pritchard Capital analysts said, "Concerns related to Hurricane Ike's path combined with fairly strong support to push natural gas futures higher to end the week." However, they noted the Sept. 5 closing price on NYMEX was lower by 49.4¢/MMbtu than the previous week's close.

Raymond James analysts said, "Our gas model suggests that the US gas market must somehow squeeze out 500 bcf of gas supply over the next year. The way we see it, such a supply reduction will not happen if gas prices (12-month futures strip) remain above $7/Mcf in 2009. We believe producers will need to either voluntarily shut-in production or reduce drilling activity. Our 2009 forecast of $6.75/Mcf assumes drilling activity rolls over in early 2009. It is important to note that the market may need to take prices even lower to rebalance the system. Such a gas price environment would be particularly bad for North American gassy names such as marginal gas producers, pressure pumpers, land drillers, and Gulf of Mexico jack up drillers."

In London, the October IPE contract for North Sea Brent dropped $2.12 to $104.09/bbl. The September contract for gas oil fell $19.50 to $953.25/tonne.

Contact Sam Fletcher at samf@ogjonline.com.


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