MARKET WATCH: Energy prices fall as fear of Ike ends

Energy prices fell Sept. 15 on preliminary evidence that Hurricane Ike inflicted less damage than some expected on oil and gas operations in the gulf or to refineries and processing plants along the coast.

Sam Fletcher
Senior Writer

HOUSTON, Sept. 16 -- Energy prices fell Sept. 15, with crude touching a 7-month low in intraday trading, on preliminary evidence that Hurricane Ike inflicted less damage than some expected on oil and gas operations in the Gulf of Mexico or to refineries and processing plants along the Gulf Coast.

The price drop "was mainly about taking off some of the Ike premium," said Olivier Jakob at Petromatrix, Zug, Switzerland. "Gasoline was the leading weight on the oil complex while the rest of the commodity spectrum did not show signs of across the board selling. However, with the continued fall in equities and commodities not playing a diversification role any more, we do believe that the risk of margin-call selling is still there, especially since credit lines have turned again harder to get."

In Houston, analysts at Raymond James & Associates Inc. reported the Sept. 15 price drop in the broader equity markets was "the largest single-day decline since the terrorist attacks on 9/11." They said, "Crude remains in free fall, posting the largest 2-day decline in 4 years."

In New Orleans, analysts at Pritchard Capital Partners LLC reported oil futures continued to fall in early trading Sept. 16 "as traders continue to pull money off the table." They said, "Earlier in 2008, oil was seen as a safe haven for weakening equities but concerns about the economy not just in the US but globally has seen traders pulling money out of commodities as the only safe haven right now appears to be cash."

Raymond James analysts said, "It is hard to be a fundamental analyst in this market, but at some point the market is going to be reminded that the tight supply and growing international demand for oil dictate a much higher price for crude."

As of midday Sept. 15, the US Minerals Management Service reported crews had not yet returned to 562 of the 717 manned production platforms and 82 of the 121 mobile offshore rigs in the Gulf of Mexico. Officials said 99.9% of the oil and 93.8% of the natural gas normally produced from federal leases in the gulf remain shut in.

The Department of Energy reported 14 refineries with total capacity of 3.57 million b/d remained shut down while 13 refineries (total capacity of 3 million b/d) were operating at reduced rates. In the Houston area, 5 petroleum products pipelines with a total capacity of 1.18 million b/d were shut down. Another nine pipelines with total capacity of 6.69 million b/d were operating at reduced rates. The latter group includes 2.4 million b/d Colonial pipeline that resumed receiving supply Sept. 15, said analysts at Friedman, Billings, Ramsey & Co. Inc. in Arlington, Va. They reported 24 natural gas processing plants (12.2 bcfd total capacity) in Texas, Louisiana, and Alabama remained shut down. They also noted that 42.5% of Texas and 4.9% of Louisiana remained without electric power as of Sept. 15.

Valero Energy Corp. reported electric power was restored to most production units at its Houston and Texas City refineries, while workers are attempting to restore power at its Port Arthur refinery. All three refineries remain shut down, however, as crews work to ensure supplies of fresh water and industrial gases. "At this time we do not have a timetable either for when startup would begin at any of the refineries or how long the startups would take. Valero's other Gulf Coast refineries remain in operation at planned rates," said a company spokesman.

ExxonMobil Corp.'s 349,000 b/d Beaumont, Tex., refinery remained without electrical power; the company said some units of its Baytown refinery might be up later in the week.

ConocoPhillips said Sept. 15 it was restarting its 300,000 b/d Sweeny, Tex., refinery. Its 195,000 b/d Alliance refinery in Belle Chasse, La., shut down since Hurricane Gustav more than 2 weeks ago, also suffered some flooding from Ike.

Marathon Oil said its 76,000 b/d Texas City refinery was without power. GreenHunter Energy Inc. expects its biodiesel refinery near Houston, reported to the nation's largest such facility, to be out of service 6-8 weeks pending restoration of electricity and natural gas service. Meanwhile, it's getting temporary interruptible power from diesel and gasoline-powered generators.

Offshore, Raymond James analysts said, "Hurricane Ike appears worse than initially expected, as several jack ups have been damaged, as well as a few semis whose moorings were broken.

Ensco International said it located "all but one" of its jack up rigs that were in the hurricane's path. The missing rig is Ensco 74, a MLT Super 116-C that was in South Marsh Island Block 149 prior to the storm. The rig is insured for $100 million, and the company has a $50 million per occurrence retention for Gulf windstorm damage losses, officials said. Ensco said it has crews aboard 8 of its 13 jack up rigs in the gulf. No damage to those rigs was reported.

Noble Corp. reported mooring failures on two of its rigs, the Noble Paul Romano and Noble Amos Runner, that drifted from their original locations. Those rigs have been boarded, and power has been restored, officials said. The mooring system of the Noble Lorris Bouzigard was damaged but it remained in the area of its primary location. It, too, has been boarded and power has been restored. Tugs are on station to assist with the start-up of each of the rigs.

Pride International Inc. said its 250-ft mat slot jack up, The Wyoming, is apparently a total loss, although the rest of its fleet appears to have weathered the storm. Pride had insured the rig for $45 million.

Energy prices
In volatile trading Sept. 15, the October contract for benchmark US sweet, light crudes fell as low as $94/bbl, the lowest intraday level since mid-February, before closing at $95.71/bbl, down $5.47 for the day on the New York Mercantile Exchange. The November contract dropped $5.56 to $95.69/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down $5.47 to $95.71/bbl. Heating oil for October declined 14.79¢ to $2.79/gal on NYMEX. The October contract for reformulated blend stock for oxygenate blending (RBOB) lost 20.82¢ to $2.56/gal.

The October natural gas contract continued to increase, however, inching up 0.8¢ to $7.37/MMbtu on NYMEX. On the US spot market, force majeure remained in effect "until further notice" at Henry Hub as operator Sabine Pipe Line LLC assesses flood damage to that facility and the Sabine pipeline. The force majeure was instituted Sept. 12 as Ike approached the Gulf Coast. Henry Hub is located at Erath, La., 234 miles east of Houston. Meanwhile, NYMEX issued its own force majeure concerning delivery obligations for August and September contract obligations that were affected by Gustav or Ike.

In London, the October IPE contract for North Sea Brent crude dropped $5.20 to $92.38/bbl. The October contract for gas oil plunged by $40.75 to $899/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 13 reference crudes lost $3.98 to $91.35/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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