MARKET WATCH: Crude prices decline as workers return to gulf

Crude prices closed at a new 5-month low Sept. 3 in the New York market as oil and gas production and processing began coming back on stream after Hurricane Gustav.

Sam Fletcher
Senior Writer

HOUSTON, Sept. 4 -- Crude prices closed at a new 5-month low Sept. 3 in the New York market as oil and gas production and processing began coming back on stream after Hurricane Gustav failed to inflict much damage on those Gulf Coast facilities earlier this week.

However, some Gulf Coast production and processing remain shut in due to storm disruptions of retail electrical power. "The key barrier to restoring Gulf of Mexico gas flows appears to be the lack of retail electric service at many of the Louisiana coastal-area processing plants," said analysts at Pritchard Capital Partners LLC, New Orleans. "Most of the pipelines with offshore links or laterals had essentially the same message: They will resume scheduling offshore receipt points on an expedited basis, but only if flowing supplies can be confirmed. In some cases the resumption of operations at onshore processing plants is also a factor." To hurry the return of electrical power, Louisiana's governor has offered the help of National Guard troops in clearing debris.

Entergy Corp. restored two critical 230-kv transmission lines Sept. 3, allowing the Louisiana's largest utility to reconnect New Orleans to the statewide power grid, officials said. Full recovery is still weeks away, however, officials said. Earlier aerial inspection showed extensive damage to power lines in the Baton Rouge area, with many steel towers down. Such damage was not inflicted by Hurricane Katrina in 2005.

Olivier Jakob at Petromatrix, Zug, Switzerland, said, "The oil industry was better prepared than in 2005 but not the utilities. Damage to the power grid is still keeping a significant amount of refinery capacity unable to restart." He said, "The loss of refined product production is translating into a sharp move in the time-spreads of gasoline deeper into backwardation; a move which is also making for a stronger 3-2-1 refinery margin on the prompt position. The loss of product is real and will surely create some local shortages and jump in cash differentials. However, as long as it is confirmed that refinery assets have not been touched, product cracks will be a sell as soon as the power lines are back (but we don't know when this will be). For crude oil, more refining capacity offline than production should translate in a higher rate of stock building."

Prices for crude and refined products were up modestly in early trading Sept. 4. "But the real action (or chaos, in the view of some observers) is confined to the spot markets," said Pritchard Capital analysts. "Very wide variations in basis differentials have pushed key spot markets for gasoline in different directions, with particular strength in Chicago and notable weakness on the West Coast. Most commodities, including gold and oil, are higher this morning and October West Texas Intermediate was able to post some overnight increases of as much as $1/bbl," they said.

Pritchard Capital warned that markets might "become more muddled" after the Energy Information Administration released its weekly statistical report on energy information Sept. 4. That report was a day late this week because of the Labor Day holiday in the US. "This is one of those reports that may be very misleading—it measures a market that was preparing for Gustav but not yet reflecting some of the panic loading or substantial delays that eventually impacted many ports over the weekend," analysts said.

US inventories
The EIA said commercial US crude inventories fell 1.9 million bbl to 303.9 million bbl in the week ended Aug. 29. The consensus among Wall Street analysts was for no change. Gasoline stocks dropped 1 million bbl to 194.4 million bbl during the same week, a little less than the 1.2 million bbl decline expected by analysts. Distillate fuel inventories declined 400,000 bbl to 131.7 million bbl vs. an expected increase of 700,000 bbl. Propane and propylene inventories increased by 900,000 bbl to 52.9 million bbl in the same period.

Imports of crude into the US dropped 149,000 b/d to 9.8 million b/d during that week. The input of crude into the US refining system increased, however, up 147,000 b/d to 15.3 million b/d with units operating at 88.7% of capacity. Gasoline production increased to 9.4 million b/d, while distillate fuels production rose to 4.5 million b/d.

EIA also reported the injection of 90 bcf of natural gas into US underground storage in the same week. That brought the amount of working gas in storage to 2.8 tcf, down 148 bcf from year-ago levels but 102 bcf above the 5-year average for that same period.

The US Minerals Management Service said as of noon Sept. 3 that workers still had not returned to 599 of the 717 manned production platforms and 91 of the 121 mobile drilling rigs in the Gulf of Mexico. Officials reported 95.8% of the oil and 91.6% of the natural gas normally produced from US leases in the gulf remained shut in.

The Louisiana Offshore Oil Port said it hoped to resume crude oil deliveries to coastal refineries Sept. 4 using onshore storage, with tanker off-loadings resuming possibly this weekend. "We found no visible damage offshore, but we need to get out there and we're working on that now," a spokeswoman said.

Meanwhile, the US Energy Department said Marathon Oil Corp. requested oil from the Strategic Petroleum Reserve to meet the supply needs of its 192,000 b/d refinery in Robinson, Ill., and its 222,000 b/d refinery in Catlettsburg, Ky. DOE did not say how much reserve oil Marathon was seeking. However, DOE officials said Citgo Petroleum Corp. withdrew its request for 250,000 bbl of oil from the emergency stockpile for the company's Lake Charles, La., refinery. The company said it found other supplies to meet its needs (OGJ Online, Sept. 3, 2008).

In other news, it was reported a helicopter crashed Sept. 3 onto the deck of the Maersk jack up drilling rig off the coast of Dubai, killing all seven people on board and forcing the closure of the Rashid oil field.

Energy prices
The October contract for benchmark US light, sweet crudes dropped 36¢ to $109.35/bbl Sept. 3 on the New York Mercantile Exchange. The November contract lost 43¢ to $109.87/bbl. On the US spot market, WTI at Cushing, Okla., closed at $109.35/bbl down from a corrected $110.21/bbl in the previous session. Heating oil for October inched up by 0.52¢ to $3.08/gal on NYMEX. The October contract for reformulated blend stock for oxygenate blending (RBOB) advanced 3.31¢ to $2.77/gal.

Analysts at Pritchard Capital said, "RBOB futures closed with a late spurt yesterday, and there are definitely concerns about near term supplies of many gasoline grades. Locations that rely on boutique summer blends could see some trouble: We are hearing of scarce supply of low Reid vapor pressure gasoline in Alabama and in western Pennsylvania, for example." They said, "Hurricane Hanna could complicate things as well since it may delay some imports of gasoline into East Coast ports. Futures don't necessarily reflect some of the wild variations in spot markets because they represent October delivery."

The October natural gas contract crept up just 0.3¢ to close at $7.26/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., fell 99¢ to $7.23/MMbtu. Henry Hub resumed trading Sept. 3 after being idle Sept. 2 due to a shutdown by operator Sabine Pipe Line in advance of the hurricane. Pritchard Capital noted, "As it became more evident Wednesday that Hurricane Gustav left the energy infrastructure in the Gulf of Mexico intact, October natural gas futures continued to press the downside, coming within a couple of pennies of breaking below $7/MMbtu" at an intraday low of $7.028/MMbtu on NYMEX.

In London, the October IPE contract for North Sea Brent crude dropped 28¢ to $108.06/bbl. Gas oil for September lost $4.75 to $974.50/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 13 reference crudes increased 29¢ to $103.69/bbl.

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