MARKET WATCHMarkets adjust as industry assesses damage

Sept. 1, 2005
Crude futures prices dipped Aug. 31 as President George W. Bush authorized the US Department of Energy to take crude from the Strategic Petroleum Reserve for refiners whose supplies were disrupted by Hurricane Katrina.

Sam Fletcher
Senior Writer

HOUSTON, Sept. 1 -- Crude futures prices dipped Aug. 31 as President George W. Bush authorized the US Department of Energy to take crude from the Strategic Petroleum Reserve for refiners whose supplies were disrupted by Hurricane Katrina.

Gasoline futures prices continued to climb in the New York market, however, with supply shortages and retail pump prices of more than $3/gal reported in some areas of the country. Other energy commodity prices are expected to trend upward over the next few months as a result of disrupted production of oil and natural gas and the shutdown of eight refineries along the US Gulf Coast.

Low inventories
"Total US refined product inventories are currently at an all-time low on a days-of-forward-demand cover basis and should fall 5-10% further over the next few weeks, due to the supply loss related to Hurricane Katrina. Gasoline inventories are the primary concern, since they are already 6% below year-ago levels," said analysts at Friedman, Billings, Ramsey & Co. Inc., Arlington, Va.

"The market appears to be forecasting this tight refined product market will continue, raising the forward curve for refining margins for 2006 to over 20% above 2005 levels. We agree and have raised our crack spread forecasts," they said.

"Our prior concern was that refined product inventories, which are currently 4% above year-ago levels, would continue rising during autumn when demand typically slows," the analysts said. "However, given the refinery outages that have occurred, we expect refined product inventories to decline significantly over the next few weeks and for the high refining margins to continue."

On Aug. 31, the Energy Information Administration reported US gasoline stocks fell by 500,000 bbl to 194.4 million bbl during the week ended Aug. 26. Commercial crude inventories plunged by 1.5 million bbl to 321.4 million bbl. Distillate fuel stocks gained 2.7 million bbl to 135.2 million bbl (OGJ Online, Aug. 31, 2005).

Storm damage
Many companies were still assessing damage to offshore and coastline oil and gas facilities at midweek.

Apache Corp., Houston, said it lost eight production platforms to Katrina, including Main Pass 312-JA; South Timbalier 161-A; South Pass (SP) 62-A; SP 62-B; West Delta (WD) 103-A; WD 103-B; WD 104-C; and WD 133-B. Before the storm, aggregate gross production from the eight lost platforms was 7,158 b/d of oil and 12.1 MMcfd of gas.

Meanwhile, Plantation Pipe Line Co. said Sept. 1 that by utilizing existing equipment and bypassing the Collins, Miss., pump station and tank farm, it restored 150,000 b/d of capacity, nearly 25% of its average daily throughput, on its refined products pipeline serving the southeastern US. It can return to normal operating capacity when electrical power is restored to the Collins pump station, officials said. The facility is high on the list of essential services that would receive priority attention, but a specific time as to when power will be restored has not been determined, they said.

Colonial Pipeline Co. said it would restore partial service with help from diesel generators allowing it to begin shipping gasoline, heating oil, and jet fuel from Houston to the East Coast. The Louisiana Offshore Oil Port, which handles 10% of US oil imports, said generators would enable it to gradually resume partial service.

So far, most exploration and production companies have reported relatively little damage to offshore facilities, said Robert S. Morris, Banc of America Securities, New York. However, he said, "Damage to subsea pipelines and onshore processing facilities (many of which are underwater) could delay restarting production from a large portion of the eastern Gulf of Mexico for weeks or months." Damage to subsea pipelines by Hurricane Ivan in mid-September 2004 "was the biggest contributor to over 172 bcf of natural gas and 43 million bbl of oil being shut-in over 6 months," he said.

The Federal Emergency Management Agency has authority to commandeer aircraft to find and rescue people stranded among the floods and destruction left in Katrina's wake. That might "further delay oil companies in checking their Gulf Coast facilities," Morris said. Nevertheless, he said, "We would expect the majority of western and central Gulf of Mexico production to be back online within the next couple of days."

Energy prices
The October contract for benchmark US sweet, light crudes dipped by 87¢ to $68.94/bbl Aug. 31 on the New York Mercantile Exchange. The same crude for November was down by 46¢ to $69.41/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., lost 87¢ to $68.95/bbl. Heating oil for September delivery declined by 2.29¢ to $2.05/gal on NYMEX. But gasoline for the same month jumped by 14¢ to a new high of $2.61/gal.

The October natural gas contract dropped 18.7¢ to $11.47/MMbtu on NYMEX. "But traders expect the downside to be limited by concerns about shut-in Gulf of Mexico production and potential for long-term damage to offshore platforms from Hurricane Katrina," said analysts at Enerfax Daily.

Meanwhile, they said, "The latest National Weather Service outlook for next week calls for above-normal temperatures in the Northeast and Central US."

On Aug. 31, EIA reported the injection of 58 bcf of natural gas into US underground storage during the week ended Aug. 26. That was down from 60 bcf the previous week and 81 bcf during the same time a year ago. It also was below the latest consensus among Wall Street analysts. US gas storage now stands at 2.6 tcf, down by 50 bcf from a year ago but 130 bcf above the 5-year average.

In London, the October contract for North Sea Brent crude lost 55¢ to $67.02/bbl. However, gas oil for September gained $15 to $638.50/tonne on the International Petroleum Exchange.

The average price for the Organization of Petroleum Exporting Countries' basket of 11 benchmark crudes increased by 74¢ to $61.10/bbl on Aug. 31.

Contact Sam Fletcher at [email protected]