Market watch: Oil prices sink as gas prices rise ahead of Hurricane Lili

Oil futures prices sank, but natural gas futures prices buoyed up on NYMEX as Hurricane Lili cut through the primary offshore production area in the Central Gulf of Mexico, headed for Louisiana.

By OGJ editors

HOUSTON, Oct. 3 -- Oil futures prices sank, but natural gas futures prices buoyed up Wednesday on the New York Mercantile Exchange as Hurricane Lili, the fourth and most powerful storm thus far in the 2001 hurricane season, cut through the primary offshore production area in the Central Gulf of Mexico, headed for Louisiana.

The November natural gas futures contract rallied as high as $4.20/Mcf Wednesday before settling at $4.16/Mcf, up 9.3¢ for the day. "Traders were short-covering and outright buying amid increasing chances (that) the hurricane could cause long-term damage to the production infrastructure in the Gulf of Mexico," analysts at Enerfax Daily reported Thursday.

However, they said the market seemed to be taking an opposite track for Lili than for Tropical Storm Isidore last week. When Isidore advanced through the gulf, downgrading from hurricane to tropical storm status, traders followed the usual pattern of "buying on the rumor" ahead of the storm and "selling the fact," triggering a price rise before the storm moved into the offshore production area and a price drop when it reached that vulnerable region. "With Lili, the market bought, then sold, the rumor and is buying the fact," Enerfax analysts reported.

The one-two punch against Gulf of Mexico production by the back-to-back storms makes Lili and Isidore the most dangerous combination since Thelma and Louise, the fictional characters of a popular 1991 movie of the same name. Offshore production of 8.6 bcfd of natural gas and 1.5 million b/d of oil was shut in ahead of Hurricane Lili, the US Minerals Management Service reported Wednesday. Isidore earlier forced the shut in of 60% of total Gulf of Mexico natural gas production in (US) federal waters, keeping 25 bcf of natural gas and 4.5 million bbl of oil off the market.

Moreover, Isidore forced closure of the Louisiana Offshore Oil Port for 6 days. LOOP opened briefly, only to be closed again by Lili.

The resulting delays of oil imports "will be made good in coming weeks," noted Paul Horsnell, head of energy research for London-based JP Morgan Chase & Co. "However, the Gulf of Mexico oil production shut in by Isidore, and now being shut in again by Lili, does represent a loss of oil from the market. This can only be replaced in the US balance by additional incremental import flows, and that takes time."

Meanwhile, the US Energy Information Administration reported early Thursday that gas injections into US underground storage dropped to 47 bcf last week, down from 67 bcf the previous week and 68 bcf during the same period a year ago, largely as a result of the gulf production shut in by Isidore. US gas storage now exceeds 3 tcf, equating to surpluses of 113 bcf year-over-year and 277 bcf compared with the 5-year average.

The November contract for benchmark US sweet, light crudes dropped 34¢ to $30.49/bbl Wednesday on NYMEX, while the December position lost 20¢ to $30.28/bbl. Heating oil for November delivery declined 0.69¢ to 81.35¢/gal. Unleaded gasoline for the same month was down 0.21¢ to 82.5¢/gal.

UBS Warburg LLC said Thursday it raised its 2002 oil price forecast by $1.70 to an average $26.20/bbl for West Texas Intermediate and $25/bbl for North Sea Brent oil.

"This increase incorporates the unexpected strength of oil prices year-to-date and reflects the continuing risk premium evident within oil markets due to the Iraqi developments," said Matthew Warburton, with UBS Warburg in New York. "Furthermore, it is based on an increasingly supportive and tightening global inventory position (during the second half of 2002) and our belief that OPEC-10 producers (the active members of the Organization of Petroleum Exporting Countries, minus Iraq) will continue to undersupply the global market with the seasonal increase in crude demand."

In London, the futures price for Brent crude lost 19¢ to $28.82/bbl on the International Petroleum Exchange. The November natural gas contract was down 3.5¢ to the equivalent of $3.18/Mcf on IPE.

The average price for OPEC's basket of seven benchmark crudes inched up1¢ to $28.51/bbl on Wednesday.

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