MARKET WATCH: Crude climbs despite financial worries

Crude prices continued to climb Sept. 18, but their increase was capped as equity markets braced for possible financial collapse.

Sam Fletcher
Senior Writer

HOUSTON, Sept. 19 -- Crude prices continued to climb Sept. 18, but their increase was capped as equity markets braced for possible financial collapse.

Tensions in the international financial markets prompted the UK's Financial Services Authority to ban stock short selling temporarily, and the US Securities and Exchange Commission indicated it would take similar action to stem the worst stock market decline in years.

That move "is a mixed bag for oil and commodities," said Olivier Jakob at Petromatrix, Zug, Switzerland. "It does reduce the fear of seeing Morgan Stanley falling; it does create the potential to see some commodity buying if cash would move back to managed portfolio (with a 5% allocation to commodities). On the other hand, it is also potentially supportive of the US dollar and is already putting some strong pressure overnight on precious metals. Also, we need to keep in mind that the American International Group Inc. (AIG) still has to sell assets in order to pay back the taxpayer; hence the risk is still there to see some selling of the AIG commodity index on any strong rebound."

Earlier this week, the US Federal Reserve announced an $85 billion emergency loan to rescue AIG, one of the world's largest insurers, from financial failure due to the collapse of the subprime mortgage market and the resulting credit crunch (OGJ Online, Sept. 18, 2008).

In Houston, analysts in the Houston office of Raymond James & Associates Inc., said, "Natural gas peaked in [Sept. 18] premarket trading at $8.32/Mcf, due to a slow restart of Gulf of Mexico natural gas production. However, a bearish storage number promptly changed the mood, with gas falling over 7% to its low of the day. Perhaps the market has finally realized that the demand destruction associated with smaller hurricanes can offset much of the shut-in production. They said, "Over the next few weeks, we expect demand destruction to largely offset the 120 bcf of production shut-ins, leaving our summer-ending storage estimate of 3.45 tcf unchanged."

The Energy Information Administration reported the injection of 67 bcf of natural gas into US underground storage during the week ended Sept. 12. That raised the amount of working gas in storage to 2.97 tcf, down 142 bcf from the same period last year but 61 bcf above the 5-year average.

Storm assessment
The US Minerals Management Service said 326 of the 717 manned production platforms and 19 of the 121 mobile offshore rigs in the Gulf of Mexico were still without crews as of midday Sept. 18. MMS reported 93% of the oil and 77.6% of the natural gas normally produced from federal leases in the gulf remained shut in.

In its assessment of storm damage, MMS reported 49 of the 3,800 offshore oil and gas production platforms in the Gulf of Mexico were destroyed by Hurricane Ike, and there is no information yet whether any of the destroyed platforms will be rebuilt. According to initial estimates, the 49 destroyed production platforms produced a total of 13,000 b/d of oil and 84 MMcfd of gas.

The MMS damage report includes three jack ups and one platform drilling rig destroyed and one jack up drilling rig with extensive damage.

Early indications were that five gas transmission pipeline systems were damaged, but the full extent of damage will not be known until operators are able to test the systems. MMS is analyzing the impact that this may have on resuming production. Following helicopter fly-overs, MMS said there were no reports of oil impacting the shoreline or affecting birds and wildlife from releases in the federal waters of the gulf.

The Department of Energy reported 12 refineries representing 3 million b/d of capacity remained shut down, and 12 refineries with capacity totaling 2.82 million b/d were running at reduced rates. In Texas and Louisiana, 10 natural gas processing plants with total capacity of 5.83 bcfd were shut down; another 16 plants with total capacity of 7.39 bcfd were restarting or operating at reduced runs. As of Sept. 18, 15% of Texas remained without electric power.

Shell Oil Co. has redeployed 1,020 workers offshore. "At our East operations, we are currently producing a small amount from a few locations. While Hurricane Ike did not damage our East-area assets, we continue repair work caused by Hurricane Gustav at some locations that could not be completed before we evacuated for Ike. We have taken the business decision to remain shut-in at some of these locations and use this time to complete essential maintenance work that had been previously scheduled for October at Mars, Ursa, and West Delta 143," officials said. They expect to resume production from those facilities the first week of October, if pipelines and processing facilities are ready to accept product. Drilling has resumed at some Shell operations offshore.

Shell Pipeline continued transporting oil inland from some eastern gulf production facilities, while assessing its central gulf gathering system and western gulf systems. The company is planning to repair its Eugene Island Block 331 intermediate pumping station platform.

The Shell-operated Capline Crude Oil Pipeline System is operating at scheduled rates. The company continues deliveries of crude on the eastern end of the Houma-to-Houston system. "Work is in progress to begin deliveries of crude oil to customers on the western end of the system over the next few days," said officials. The company's finished product storage and delivery systems in Houston are fully operational and delivering to connecting truck terminals and pipelines. Shell's Port Arthur, Tex., storage and delivery systems are using portable generators to make limited deliveries from inventory.

Pioneer Southwest Energy Partners LP, managed by Pioneer Natural Resources, said 10% of its West Texas Spraberry production has been curtailed due to damage at a third-party facility in Mont Belvieu, Tex., that fractionates the high liquid content gas.

Lufkin Industries said all of its facilities are running as normal following minimal damage from Hurricane Ike.

T-3 Energy reported no damage to its eight facilities on the Gulf Coast, but operations were suspended for 2-14 days due to power loss and personnel evacuations.

W&T Offshore reported small impact on production although two of its platforms at Eugene Island sank, along with a third-party facility that serviced Ewing Banks Block 949.

Stone Energy said six of its structures were lost due to Hurricane Ike.

PetroQuest said its Vermillion Block Block 287 production facility sustained minor damage, but 1.2 MMcfd of gas equivalent production will be shut in 120 days. Company officials said 66% of PetroQuest's Gulf Coast production remains off-line as the company waits for pipelines and processing plants to resume operations.

Energy prices
The October contract for benchmark US light, sweet crudes traded at $95.73-102.24/bbl Sept. 18 before closing at $97.88/bbl, up 72¢ for the day on the New York Mercantile Exchange. The November contract gained 58¢ to $97.54/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up 72¢ to $97.88/bbl. Heating oil for October delivery dropped 4.23¢ to $2.78/gal on NYMEX. The October contract for reformulated blend stock for oxygenate blending (RBOB) increased 1.94¢ to $2.48/gal.

October natural gas fell 28.9¢ to $7.62/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., shot up 33¢ to $8.11/MMbtu.

In London, the November IPE contract for North Sea Brent crude was up 35¢ to $95.19/bbl. Gas oil for October rebounded by $19.25 to $900/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 13 reference crudes gained $2.18 to $89.39/bbl on Sept. 18.

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