MARKET WATCHEnergy prices fall as OPEC pledges spare capacity

Sept. 21, 2005
Energy prices retreated Sept. 20 but kept most of the gains from record spikes in the previous session as the Organization of Petroleum Exporting Countries promised, if necessary, to release its remaining 2 million b/d of spare production capacity for a period of 3 months, starting Oct. 1.

Sam Fletcher
Senior Writer

HOUSTON, Sept. 21 -- Energy prices retreated Sept. 20 but kept most of the gains from record spikes in the previous session as the Organization of Petroleum Exporting Countries promised, if necessary, to release its remaining 2 million b/d of spare production capacity for a period of 3 months, starting Oct. 1.

Many analysts and political leaders outside of OPEC had expected the cartel to hike production by 500,000 b/d to 28.5 million b/d at its meeting in Vienna. OPEC production currently is estimated at 28.3 million b/d. Including Iraqi production, OPEC output is 30.2 million b/d.

Some observers said OPEC's alternative action effectively suspends its current production quota of 28 million b/d for only the second time in the group's history. The first occurred in 1990 when Iraq invaded Kuwait.

Saudi Arabia is the OPEC member with the spare production capacity, which is primarily sour crude with a high sulfur content that cannot be processed by many refiners. Recent efforts by both Saudi Arabia and the US Department of Energy to market sour crude found few buyers.

Still, DOE approved Sept. 20 a seventh loan request for crude from the Strategic Petroleum Reserve—600,000 bbl of sour crude for Total Petrochemicals USA Inc. Under that program so far, DOE has distributed 13.2 million bbl of mostly sweet crude out of SPR.

Storm damage
Industry experts claim that it's not more crude that is needed but more refining capacity to process the crude already available. Four Gulf Coast refineries with a combined capacity of 900,000 b/d—Chevron Corp. in Pascagoula, Miss.; ConocoPhillips, Belle Chasse, La.; ExxonMobil Corp., Chalmette, La; and Murphy Oil Corp., Meraux, La.—were disabled by Hurricane Katrina. Now Hurricane Rita is gathering strength in the Gulf of Mexico and is expected to come ashore later this week near Houston, the center of another major concentration of refineries.

Refineries in the Houston area continued normal operations Sept. 21 even as workers began securing those facilities and implementing plans for systematic shutdowns before the storm makes landfall.

The Texas Gulf Coast has four concentrations of refineries with capacities totaling 4 million b/d, about 23% of total US refining capacity. There are four refineries in the Beaumont-Port Arthur area with combined capacity of 1 million b/d, six in and around Houston with 1.6 million b/d, three in Texas City with 740,000 b/d, and four in Corpus Christi with 690,000 b/d.

Early on Sept. 21, Rita strengthened into a Category 3 hurricane and was 175 miles west of Key West, Fla., moving west at 14 mph. It was expected to remain on that course for 24 hr, gathering strength over the Gulf of Mexico. The latest extended forecast said the eye of the storm would make landfall near Galveston, south of Houston, late Sept. 23 or early Sept. 24. Mandatory evacuation of Galveston Island was scheduled to start Sept. 21. That city was virtually wiped out by a hurricane that killed 6,000 people in 1900.

Texas City is close to Galveston; the Houston refineries are about 45 miles north.

Offshore workers still struggling to restore oil and natural gas production in the Gulf of Mexico shut in by Katrina are again evacuating offshore facilities ahead of the latest hurricane. The US Minerals Management Service reported 15 rigs and 136 platforms evacuated Sept. 20, including 2 rigs and 83 platforms to which crews had not yet returned following Katrina. Shut-in production increased to 877,275 b/d of crude and 3.5 bcfd of natural gas. That's equivalent to 58.5% of the normal oil production and 34.8% of the normal gas production from the gulf. Cumulative offshore production lost since Aug. 26 totals 26 million bbl of crude and 120.4 bcf of gas, said MMS.

Meanwhile, Chevron repaired a hurricane-damaged product berth at its Pascagoula refinery and is now moving imported gasoline, diesel, and jet fuel from that site to its Collins, Miss., terminal and to the Plantation Pipeline for delivery to the southeastern US (OGJ Online, Sept. 20, 2005). However, the company doesn't expect to start up a processing train at that site until mid-October and said it would be mid-November before the refinery is fully operational.

Inventories increase
Commercial US inventories of crude inched up by 300,000 bbl to 308.1 million bbl during the week ended Sept. 16, the Energy Information Administration reported Sept. 21. Distillate fuel stocks increased by 800,000 bbl to 134.1 million bbl, while gasoline inventories jumped by 3.4 million bbl to 195.4 million bbl.

Imports of crude into the US increased by 704,000 b/d to 9.8 million b/d during the same week. Input of crude into US refineries gained by 660,000 b/d to 15.3 million b/d with refineries operating at 90.8% of capacity. Gasoline production rose substantially in the latest period, and distillate fuel also was up, EIA said.

Energy prices
The October contract for benchmark US light, sweet crudes fell by $1.16 to $66.23/bbl Sept. 20 on the New York Mercantile Exchange. The November contract dropped $1.31 to $66.20/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down by $1.16 to $66.24/bbl. Gasoline for October delivery lost 6.61¢ to $1.98/gal on NYMEX. Heating oil for the same month declined by 2.71¢ to $2.01/gal.

The October natural gas contract fell by 17.1¢ to $12.49/MMbtu on NYMEX, "pressured by a sharp sell-off in crude oil, but losses were limited by concerns that Hurricane Rita would disrupt Gulf of Mexico gas production," said analysts at Enerfax Daily.

In London, the November contract for North Sea Brent lost $1.41 to $64.20/bbl on the International Petroleum Exchange. The October gas oil contract plunged by $22.25 to $599.25/tonne.

The average price for OPEC's basket of seven benchmark crudes increased by 74¢ to $58.30/bbl Sept. 20.

Contact Sam Fletcher at [email protected]