MARKET WATCHEnergy prices continue to slip

Sept. 12, 2005
Energy prices slipped Sept. 9 as Gulf Coast oil and natural gas operations continued to recover from Hurricane Katrina amid projections that energy demand had weakened because of damage to factories and businesses in the storm area.

Sam Fletcher
Senior Writer

HOUSTON, Sept. 12 -- Energy prices slipped Sept. 9 as Gulf Coast oil and natural gas operations continued to recover from Hurricane Katrina amid projections that energy demand had weakened because of damage to factories and businesses in the storm area.

With some refineries and gas processing plants remaining idle and damage assessments still under way along much of the Gulf Coast, the US supply infrastructure remained seriously hobbled.

"While the US and International Energy Agency countries have begun the process of releasing both strategic crude and product reserves, the prospect of gasoline shortages near term has kept the markets on edge," said Robert Morris, Banc of America Securities LLC, New York.

In a report Sept. 10, the US Minerals Management Service said crews had not yet returned to three offshore rigs and 122 production platforms in the Gulf of Mexico. MMS also reported that 897,605 b/d of oil and 3.8 bcfd of natural gas are shut in. That amounts to 59.8% of the crude and 38.2% of the gas normally produced from the gulf. Production lost during the period of Aug. 26-Sept. 10 totals 17.1 million bbl of crude and 84.2 bcf of natural gas.

Hurricane Katrina will likely curtail world oil production by 55 million bbl through the end of the year—about the same as Hurricane Ivan in 2004, IEA said Sept. 9.

Refining capacity
As of Sept. 11, four Gulf Coast refineries remained shut down—Chevron Corp. in Pascagoula, Miss.; ConocoPhillips, Belle Chasse, La.; ExxonMobil Corp., Chalmette, La; and Murphy Oil Corp., Meraux, La.—with a combined capacity of nearly 900,000 b/d, or 5% of total US refining capacity.

"These refineries could remain offline for 3 months or longer," said Morris in a Sept. 12 report.

The US Energy Information Administration reported a gasoline inventory drawdown of 4.3 million bbl in the week ended Sept. 2.

Analysts at Friedman, Billings, Ramsey & Co. Inc. in Arlington, Va., estimate that Katrina shut down 1.8 million b/d of refining capacity for the whole week, while 2.4 million b/d refining capacity ran at reduced rates. "Assuming that these refineries normally run at a 90% utilization rate and that approximately 50% of the product yield is gasoline, then inventories should have declined by about 8.2 million bbl, not 4.3 million bbl," they said.

Therefore, they said, "We estimate there will be an additional 4 million bbl drop in gasoline inventories. . .that should either be reported in future data via higher implied demand or a revision."

The Friedman, Billings, Ramsey analysts expect gasoline inventories to continue falling over the next few months, supporting strong refining margins. "A gradual decline in inventories may not cause retail gasoline prices to spike to $4/gal, but it should keep prices at the $3/gal level for longer," they said.

All major petroleum pipelines for both crude oil and refined product are at or near prehurricane capacity, the Department of Energy reported. However, other sources said it may take weeks for Gulf Coast oil and gas operations to return to normal, depending on damage to pipelines in the eastern gulf.

Natural gas
"Four onshore natural gas processing plants with a combined processing capacity of up to 4 bcf/d could also remain off line for several months, although some natural gas production could be bypassed and still meet pipeline specs," Morris said.

DOE said 15 natural gas processing plants in Alabama, Mississippi, and Louisiana sustained flooding, damage to equipment, or power failure as a result of the storm but that 7 were operating again as of Sept. 9. Resuming operations are two Crosstex Energy Inc. plants, Gibson and Plaquemine; four Enterprise Products Partners LP plants, Calumet, Neptune, North Terrebone, and Pelican; and Williams Cos. Inc.'s Midstream plant in Mobile Bay. "It appears that only a few plants have sustained damage and could take a few weeks for them to come online again," DOE officials said.

"We fear the impact to natural gas may be longer lasting" than oil effects, said Ronald J. Barone, UBS Securities LLC, New York. "Two weeks prior to Hurricane Katrina, a warmer than normal summer eliminated the year-over-year [natural gas] storage surplus, leaving just a 98 bcf surplus over the 5-year average and placing the 3.2 tcf consensus storage target for Nov. 1 in jeopardy (UBS currently estimates storage of 3.1 tcf)."

Furthermore, he said: "Given the continued increase in natural gas demand when combined with continued production declines, many industry watchers have questioned whether 3.2 tcf is enough in storage to enter a typical winter heating season. Unlike oil, due to limited LNG import capacity, the US must rely on US and Canada production for the majority of its natural gas needs. The devastation brought by Katrina reduced production in the gulf by 85% last week and by 40% this week; currently 4 bcfd of production remains shut in, and upwards of 1 bcfd of supply could be permanently lost. Beyond the physical damage wrought by Katrina, the industry will face other challenges, including attracting personnel who are willing to return to southern Louisiana, with its severely damaged infrastructure."

Citing the decline of US gas production despite record rig counts, flat imports from Canada, modest LNG growth before 2008, rising finding and development costs, and damage from Hurricane Katrina, Barone said, "We expect natural gas prices to remain high."

On Sept. 12, Raymond James & Associates Inc. its price annual average price forecasts $56/bbl for crude and $7.90/Mcf for natural gas in 2005 and to $58/bbl for oil and $9.25/Mcf for gas in 2006, assuming a pullback in oil prices in the first quarter of 2006. "Even though our new forecasts are more than 15% above consensus expectations, they are 15% below the futures strip. Ultimately, we believe that the futures market will be more right than Wall Street," Raymond James said.

Energy prices
The average price for the October contract of benchmark US light, sweet crudes fell by 41¢ to $64.08/bbl on the New York Mercantile Exchange. The November contract lost 37¢ to $64.90/bbl. On the US spot market, West Texas Intermediate was down by 41¢ to $64.09/bbl. Gasoline for October delivery plunged by 7.58¢ to $1.96/gal. Heating oil for the same month dropped 7.58¢ to $1.90/gal. Natural gas declined by 8.4¢ to $11.26/MMbtu.

In London, the October contract for North Sea Brent crude lost 24¢ to $62.84/bbl on the International Petroleum Exchange. Gas oil for September gained $6.50 to $599.75/tonne,

The average price for the Organization of Petroleum Exporting Countries' basket of 11 benchmark crudes increased by 10¢ to $57.58/bbl on Sept. 9. So far this year, OPEC's basket price has averaged $49.31/bbl.

Contact Sam Fletcher at [email protected].