MARKET WATCH: Lack of supply disruptions lowers energy prices

Oil prices dropped to a 5-month low of $105.46/bbl in intraday trading before closing a little under $110/bbl Sept. 2 on indications of little disruption by Hurricane Gustav to oil and gas operations in the gulf.

Sam Fletcher
Senior Writer

HOUSTON, Sept. 3 -- Crude prices dropped to a 5-month low of $105.46/bbl in intraday trading before closing a little under $110/bbl Sept. 2 on indications of little disruption by Hurricane Gustav to oil and gas operations in the Gulf of Mexico and along the US Gulf Coast during the 3-day Labor Day weekend.

Although still near historical highs, the price of crude on world markets is down sharply from a record $147/bbl in early July, primarily due to declining global demand for crude because of economic weakness in the US and Europe.

"Oil prices continue to slide as the market regains its composure in the wake of Hurricane Gustav," said analysts at Pritchard Capital Partners LLC, New Orleans. "Most oil refineries standing in the path of Gustav are in the process of resuming production and report only minor damage. However, power issues remain a problem as electrical outages plague some regions."

The Department of Energy's Office of Electricity Delivery and Energy Reliability earlier reported 12 Gulf Coast refineries with combined capacities representing 12% of the US total were idle and 10 more had reduced operations Sept. 1 because the hurricane. Refinery outages totaled nearly 2.1 million b/d (OGJ Online, Sept. 1, 2008). The DOE said 49% of Louisiana remained without electric power Sept. 2.

EQECAT Inc. in Oakland, Calif., a wholly owned subsidiary of ABS Group that describes itself as the leading authority on extreme-risk modeling, reduced its earlier estimate of total onshore insured losses as a result of Gustav to $3-7 billion, primarily in Louisiana, from an initial landfall estimate of $6-10 billion. However, EQECAT stood by its estimate that "shut-in production for the next year will not exceed about 5% of the production capacity for crude oil, and 5% of production capacity for natural gas," said company officials. They will assess any potential damage to coastal refineries "in coming days."

The US Minerals Management Service reported Sept. 2 that workers were evacuated from 632 of the 717 manned production platforms and 110 of the 121 drilling rigs in the US sector of the gulf. It said 100 % of the estimated 1.3 million b/d of oil and 95.4 % of the estimated 7.4 bcfd of natural gas production from federal leases in the gulf were shut in because of the hurricane.

Pride International Inc. said air reconnaissance found no visible damage to its jack up rigs in or near the path of Hurricane Gustav. Workers will conduct a more thorough inspection as they return to those units.

Noble Corp. said a preliminary survey of its rigs in the gulf revealed no damage from the storm. The Sugar Land, Tex., company said it expects to complete a more comprehensive assessment of individual rigs over the next few days.

Hornbeck Offshore Services Inc. said its offshore supply vessel fleet continues to operate at 100% utilization. It hasn't yet been able to assess conditions at its port facility in Port Fourchon, La., but preliminary reports indicate the area sustained minor damage.

Chevron Corp. said initial assessments indicated no serious damage to the deepwater Henry Hub complex in the Gulf of Mexico; the company partially lifted its force majeure resulting from the Aug. 30 evacuation of Vermillion Parish.

The 1.3 million b/d Louisiana Offshore Oil Port (LOOP), the only US port capable of accommodating the largest supertankers, has not yet resumed operations that were suspended Aug. 30 However, the Houston Ship Channel has reopened.

On Sept. 2, Jacques H. Rousseau, an analyst at Soleil-Back Bay Research, said, "No major refinery problems related to Hurricane Gustav have been reported yet. However, it could take a few more days before the full extent of the damages are known."

Bloomberg News reported Citgo Petroleum Corp., owned by Petroleos de Venezuela SA, asked DOE to supply 250,000 bbl of crude from the US Strategic Petroleum Reserve to the company's 429,500 b/d Lake Charles, La., refinery, which is among those operating at reduced runs. That is the only request for SPR crude that the DOE has received so far.

Shell Oil Co.'s chemical plant and a refinery belonging to Motiva Enterprises LLC (a Shell-Saudi Aramco joint venture) in Norco, La., maintained some power Sept. 2, and initial assessments indicated minimal damage to either facility. "Depending on resources, a restart for some units could begin over the next couple of days," officials said. Motiva's Convent, La., refinery was reported to have no electrical power due to downed power lines. Officials said additional back-up generators are enroute. "Restart of the refinery will depend on further assessments, repairs that are needed, and availability of dependent resources," they said. Shell Chemical's Geismar plant was without power as assessments continued. Initial reports indicated power lines were down.

Motiva's Port Arthur, Tex., refinery was running at reduced rates Sept. 2. "There were no physical impacts to facilities from the storm. The site will look to ramp up production safely and as quickly as possible," said company officials. Shell's Deer Park, Tex., refinery and chemical plant continued to operate, as did the Shell Chemical plant in Mobile, Miss.

Pritchard Capital Partners said, "All in all the Gulf Coast refining infrastructure came out of the storm in good fashion—important since more than 2 million b/d of refining capacity was idled by the storm. Prices shot up in advance of Gustav but have taken a pounding since."

The Association for Oil Pipelines said Capline and LoCap pipelines, representing a total of 2.4 million b/d of capacity, are shut down Sept. 2. Colonial Pipeline Co.'s 2.4 million b/d pipeline and Plantation Pipe Line Co.'s 600,000 b/d pipeline system that together move petroleum products to most markets east of the Mississippi River are operating at reduced rates.

Shell shut in all of its offshore crude pipelines, its operated Capline crude pipeline system, and its Houma-to-Houston crude oil pipeline system prior the hurricane. The company was in the process of fly-over assessments of its Gulf Coast pipelines and said it expected to have initial visual assessments completed Sept. 3. So far, it reported no major damage to any facilities and that products in pipelines and tanks were contained. "Power is out at many facilities, and we are working diligently with our utility providers to restore power systems safely and as quickly as possible. We are also deploying portable generators to assist in the recovery and restart process. Access to some areas due to debris on roadways and downed power lines remains a concern, and we will complete assessments when local authorities deem it safe for full access," Shell officials said. Meanwhile they said, "Our refined products delivery systems in the Houston area continue to transport gasoline, diesel, and aviation fuel."

Swift Energy Co. in Houston also was doing fly-over inspections of its coastal Louisiana properties Sept. 2. The company shut in all of its fields in south Louisiana, moved all of its contracted drilling rigs to safe harbor, and evacuated all workers in the path of Gustav by Aug. 31. Gustav made landfall Sept. 1, as a Category 2 Hurricane south of Houma, La., and 70 miles southwest of New Orleans. Like many companies, Swift Energy carries replacement property insurance for its facilities and shore base, with standard deductibles.

Energy prices
The October contract of benchmark US light, sweet crudes dropped $5.75 to close at $109.71/bbl Sept. 2 on the New York Mercantile Exchange. The November contract lost $5.55 to $110.30/bbl. On the US spot market, a price for West Texas Intermediate at Cushing, Okla., was not available. Heating oil for October was down 11.83¢ to $3.07/gal on NYMEX. The October contract for reformulated blend stock for oxygenate blending (RBOB) retreated 12.05¢ to $2.73/gal.

The October natural gas contract fell 68.2¢ to $7.26/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., was unchanged at $8.22/MMbtu.

In London, the October IPE contract for North Sea Brent dropped $1.07 to $108.34/bbl. The September contract for gas oil fell $7.75 to $979.25/tonne.

The average price of the Organization of Petroleum Exporting Countries' basket of 13 benchmark crudes fell $6.62 to $103.40/bbl on Sept. 2.

Contact Sam Fletcher at

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