MARKET WATCHNatural gas price climbs; crude falls

Oct. 5, 2005
Natural gas futures prices continued to climb, and crude futures continued to fall Oct. 4 in reaction to statements by two members of US President George W. Bush's cabinet.

Sam Fletcher
Senior Writer

HOUSTON, Oct. 5 -- Natural gas futures prices continued to climb, and crude futures continued to fall Oct. 4 in reaction to statements by two members of US President George W. Bush's cabinet.

Natural gas prices jumped in late trading on the New York market after Interior Sec. Gale Norton acknowledged that it may take months to revive oil and gas production in the Gulf of Mexico to prehurricane levels.

However, traders apparently are comfortable with Energy Sec. Sam Bodman's earlier assurances that the administration will use emergency stocks of crude and heating oil to avoid shortages. Traders also see eroding demand for petroleum products because of recently high prices. But loss of refining capacity to Hurricanes Rita and Katrina limited the price fall on the New York market.

Hurricane effects felt
The impact on the US oil industry of two major hurricanes in less than a month was evident in the Energy Information Administration's Oct. 5 report on US inventories. Commercial stocks of crude, excluding the Strategic Petroleum Reserve, dipped by 300,000 bbl to 305.4 million bbl during the week ended Sept. 30, said EIA. But gasoline inventories plunged by 4.3 million bbl to 195.5 million bbl, near the lower end of the average range for this time of year. Distillate fuel inventories dropped 5.6 million bbl to 128 million bbl during the same period, with a sharp decline in diesel fuel offsetting a slight rise in heating oil.

With the Louisiana Offshore Oil Port, the biggest US facility for importing crude, temporarily shut down by Hurricane Rita when the storm came ashore Sept. 24 near the Texas-Louisiana border, US crude imports fell by nearly 1.6 million b/d to 8.1 million b/d in the week ended Sept. 30. Crude input into US refineries plummeted by 2.9 million b/d to 11.7 million b/d, with refineries operating at 69.8% of capacity that week after many Gulf Coast facilities shut down in preparation for the hurricane. "Gasoline and distillate fuel production declined dramatically," said EIA.

Some refineries have since resumed operations (OGJ Online, Oct. 4, 2005). Citgo Petroleum Corp. said power was being restored "progressively this week" to its 336,800 b/d Lake Charles refinery, which was shut down Sept. 23. Restart of the first boiler unit—"a key step of the start-up sequence"—was imminent Oct. 5.

However, Valero Energy Corp., San Antonio, took down the fluid catalytic cracker at its 83,000 b/d Houston facility to make needed repairs, which are expected to take 10-12 days to complete with the resulting loss of 40,000 b/d of gasoline production and 10,000 b/d of distillate production. "We made every possible attempt to keep the unit running, but vibrations reached a level where we needed to bring the unit down on a controlled basis," said a company representative.

"We have been monitoring the FCC unit's condition for some time and knew that we would have to [make a] shutdown at some point prior to the scheduled turnaround next year. Our observations following Hurricane Rita's restart have revealed that the condition has deteriorated to the point where a shutdown is now required. While the hurricane shutdown did not cause this problem, the problems with the FCC unit were exacerbated by the shutdown," she said.

Offshore operations
The US Minerals Management Service said crews still had not returned to 342 platforms and 17 drilling rigs in the Gulf of Mexico as of Oct. 4. It said 1.3 million b/d of crude and 7.2 bcfd of natural gas production are still shut in. That's equivalent to 89.97% of the crude and 71.7% of the natural gas normally produced in those waters. Cumulative gulf production lost since Aug. 26 now totals 46.5 million bbl of crude and 226.6 bcf of gas.

Of the 4,000 offshore platforms that the MMS administers in the gulf, 3,050 were in the path of Hurricanes Katrina and Rita. Preliminary assessment indicates that 108 of the older "end of life" facilities not built to MMS's upgraded design standards were destroyed by the hurricanes. However, those facilities accounted for only 1.7% of the gulf's oil production and 0.9% of its gas production. "As a result, only a very small percentage of production is expected to be permanently lost," Norton said. A further 53 platforms suffered significant damage in the storms.

"Due to Hurricanes Katrina and Rita effectively removing eight jack ups (or about 7%) from an already supply-constrained market, we believe the Gulf of Mexico is on the cusp of a meaningful step-change in jack up [rig] day rates," said J. Marshall Adkins, an analyst in the Houston office of Raymond James & Associates Inc.

Shell Oil Co. said underwater investigation revealed that the 12-in. gas export line from the tension-leg platform in its Auger natural gas and oil field in 2,860 ft of water on Garden Banks Block 426 was damaged at two locations on the ocean floor and will take 4-6 weeks to repair, weather permitting. Officials said Auger is ready to resume production once the pipeline repairs are completed.

"Except for gas production at Fairway (Mobile Bay), all Shell net [gulf] production (operated and outside-operated) was shut in because of Hurricane Rita," said company officials. "As of this week, production at Shell-operated Brutus, Glider, Bullwinkle, Enchilada, Popeye, Fairway, and North Padre Island fields is flowing and ramping up to prehurricane rates. Fields scheduled to come on production over the next few weeks are Salsa and Cougar, as well as partial production at Ram Powell and Main Pass 252."

Energy prices
The November natural gas contract jumped by 20.7¢ to $14.22/MMbtu Oct. 4 on the New York Mercantile Exchange, "with front months boosted by short-covering [of excess sales contracts] on concerns about damage done to Gulf Coast gas facilities by the two recent hurricanes," said analysts at Enerfax Daily. "Prices could move still higher amid fears of a shortage this winter."

Meanwhile, Sabine Pipeline LLC, operator of the Henry Hub, La., gas collection point, lifted its force majeure at two interconnects Oct. 4. NYMEX then lifted its force majeure on September and October deliveries at Henry Hub (OGJ Online, Sept. 28, 2005).

The November contract for benchmark US light, sweet crudes fell by $1.57 to $63.90/bbl on NYMEX, with the December position retreating by $1.53 to $63.76/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down by $1.57 to $63.91/bbl. Gasoline for November delivery dropped 4.65¢ to $2.02/gal. Heating oil for the same month declined by 3.12¢ to $2.05/gal.

In London, the November contact for North Sea Brent crude lost $1.58 to $61.22/bbl on the International Petroleum Exchange. Gas oil for October declined by $20 to $607.75/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 11 benchmark crudes fell by $1.63 to $56.48/bbl Oct. 4.

Contact Sam Fletcher at [email protected]