MARKET WATCHEnergy prices fall as supplies increase

Sept. 7, 2005
Energy prices continued to fall Sept. 6 as oil and gas production ramped up in the Gulf of Mexico and Gulf Coast refineries resumed operation in the wake of Hurricane Katrina.

Sam Fletcher
Senior Writer

HOUSTON, Sept. 7 -- Energy prices continued to fall Sept. 6 as oil and gas production ramped up in the Gulf of Mexico and Gulf Coast refineries resumed operation in the wake of Hurricane Katrina.

Markets also anticipated the release of crude and petroleum products stockpiled by the 26 members of the Paris-based International Energy Agency, in cooperation with the European Union. The two groups agreed Sept. 2 to supply 60 million bbl of crude and refined products to world markets over 30 days, "allowing market mechanisms to provide the most efficient method of directing the oil where it is needed," IEA officials said.

Additional supplies
The "initial response" of 2.1 million b/d will be "94% stockdraw, 3% demand restraint, and 3% increased indigenous production," said IEA officials on Sept. 7. The bulk of that contribution—52%— will be supplied by North America, with the US accounting for 44.2% and Canada for 4.6%.

The US Department of Energy earlier announced plans to sell 30 million bbl of crude from the Strategic Petroleum Reserve, with bids due by Sept. 9 and delivery dates to winners in October unless a buyer can take delivery earlier.

The proportion of the contribution from any single IEA member is based on that nation's oil consumption as a portion of the group's total oil consumption, officials said. Other major contributors will be Japan 12.2%, Germany 6%, South Korea 4.8%, France 4.6%, Italy 4.1%, the UK 3.6%, and Spain 3.5%.

The IEA stockdraw will be 1,289,000 b/d of crude and 683,000 b/d of products, including 369,000 b/d of gasoline, 276,000 b/d of middle distillates, and 38,000 b/d of fuel oil. "Outside the US, the largest stockdraw contribution will be 545,000 b/d of finished products from Europe, consisting of 317,000 b/d motor gasoline, 190,000 b/d middle distillates, and 38,000 b/d fuel oil," officials reported.

Meanwhile, the Venezuelan embassy in Washington said Sept. 7 that Petroleos de Venezuela SA (PDVSA) will supply more than 960,000 bbl of additional gasoline to the US in four shipments this month. That gasoline, taken from storage and diverted from other customers, will be sent to and distributed by PDVSA's US subsidiary Citgo Petroleum Corp. in addition to previously scheduled shipments of 1.2 million bbl in September. Venezuela is not a member of IEA.

Kuwait earlier pledged a $500 million aid package to the US to help deal with the devastation caused by the hurricane. That aid is to include "both humanitarian and petroleum supplies, in particular gasoline," officials said, but it first must be approved by a special session of Kuwait's parliament, now in summer recess.

Industry recovering
As of Sept. 6, the US Minerals Management Service said crews had not yet returned to 27 mobile rigs and 192 offshore platforms in the Gulf of Mexico. As a result, 870,374 b/d of oil and 4.16 bcfd of natural gas production remained shut in. That's equivalent to more than 58% of crude and 41.6% of the natural gas normally produced from the gulf. Production losses during the period of Aug. 26-Sept. 6 totaled 12.75 million bbl of crude and 67.6 bcf of natural gas.

Katrina was the fourth storm to disrupt oil and gas production in the gulf this year. Hurricane Dennis disrupted production of 5.29 million bbl of oil and 23.3 bcf of gas; Tropical Storm Cindy, 312,127 bbl of oil and 1.7 bcf of gas; and Hurricane Emily, 240,024 bbl of oil and 1.58 bcf of natural gas.

"The offshore rig industry actually emerged in fairly good shape with minor damage on several rigs and severe damage on six rigs" from Hurricane Katrina, said analysts at Jefferies & Co. Inc. "In all, it appears that roughly 16 rigs out of 132 active rigs (excluding platform rigs) in the gulf incurred some sort of notable damage as a result of the storm with as many as 6 likely to be total constructive losses."

Rowan Companies Inc.'s Rowan New Orleans jack up capsized. Diamond Offshore Drilling Inc.'s Ocean Warwick jack up also is likely a constructive loss, "as well as four platform rigs," analysts said. Transocean Inc.'s Deepwater Nautilus semisubmersible rig "incurred significant damage to its mooring system and subsea well control system" and "could be down at least 3 months," said Jefferies analysts.

The Louisiana Offshore Oil Port is now working at 75% of its maximum capacity, with two of three births open, officials reported. Utility workers said they would soon supply electrical power to LOOP's tank facility, giving the port access to the special crudes that refiners are requesting. Seven tankers are awaiting access to LOOP, and the port may be back to normal operation by Sept. 11, DOE officials reported.

DOE's Office of Electricity Delivery and Energy Reliability reported that of 10 Gulf coast refineries shut down by Katrina, three were in various stages of restarting by the afternoon of Sept. 6. A fourth, Motiva's 226,500 b/d refinery at Norco, La., sustained limited damage and was thought to be able to restart at midweek. Others still had no power or remained subject to damage assessment.

Energy prices
The October contract for benchmark US light, sweet crudes dropped $1.61 to $65.96/bbl Sept. 6 on the New York Mercantile Exchange, with the November position down by $1.45 to $66.71/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., lost $1.61 to $65.97/bbl. Gasoline for October delivery plunged by 12.87¢ to $2.06/gal as more Gulf Coast refineries regained production. Heating oil for the same month decreased by 3.68¢ to $2.05/gal. The October natural gas contract on NYMEX dipped by 3.4¢ to $11.66/MMbtu.

In London, the October North Sea Brent crude contract lost 18¢ to $64.67/bbl on the International Petroleum Exchange. Gas oil for September gained $9.75 to $632.25/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 11 benchmark crudes retreated by 17¢ to $59.05/bbl.

Contact Sam Fletcher at [email protected]