MARKET WATCHEnergy prices fall as storm veers toward Florida

Sam Fletcher
Senior Writer

HOUSTON, Aug. 29 -- Energy prices tumbled Aug. 28 to the lowest levels in many weeks as Tropical Storm Ernesto veered toward Florida after briefly reaching hurricane strength over the weekend.

The National Hurricane Center said Ernesto generated hurricane-force winds Aug. 27 but weakened to tropical storm status before it passed over Cuba Aug. 28. It could strengthen into a hurricane again before it reaches central Florida on Aug. 31, said weather officials. Since the storm is likely to miss oil and natural gas operations in the Gulf of Mexico, nonessential workers who were evacuated over the weekend are now returning to offshore facilities.

"Exactly 1 year has passed since Hurricane Katrina struck the Gulf of Mexico, demolishing pipelines, toppling offshore rigs, and causing commodity prices to soar to then-record highs," said analysts in the Houston office of Raymond James & Associates Inc. "The hurricane left an enduring mark on the energy complex, as evidenced by the high commodity price volatility these past 2 weeks."

Meanwhile, Shell Oil Co. and Motiva Enterprises LLC, the joint venture of Shell and Saudi Refining Inc., activated a volunteer program to maximize fuel available at retail outlets in Florida. To avoid a gridlock like the one that clogged evacuation routes in the Houston area when Hurricane Rita struck the Texas Coast last September, Shell plans priority deliveries of fuel to stations along evacuation routes, at strategic emergency response locations, and in densely populated areas in Florida.

Motiva will prefill as many of its tanker trucks as possible at its product terminals in Tampa and Ft. Lauderdale before those terminals shut down ahead of the storm. Meanwhile, Shell and Motiva have stored generators in strategic areas away from the storm's projected path to be rapidly deployed to fuel terminals and retail sites as needed after the storm passes.

With Ernesto no longer perceived as a threat to offshore operations in the gulf, Raymond James analysts said, "The energy markets are now shifting attention back to Iran, which faces a [United Nations] deadline to stop uranium enrichment [on Aug. 31]. While there is no imminent threat of an Iranian supply disruption, the nuclear standoff looks set to continue for a long time."

Iran currently is producing 35,000 b/d of oil below its assigned quota of 4.11 million b/d but will soon make up that shortfall, said Iranian Oil Minister Kazem Vaziri Hamaneh over the weekend. No other details were provided. Iran wants to increase its crude production capacity to 4.6 million b/d by 2010.

Energy prices
The October contract for benchmark US sweet, light crudes closed at $70.61/bbl, down by $1.90 after trading at $70.15-72.20/bbl Aug. 28 on the New York Mercantile Exchange. That was the lowest closing price for a front-month crude contract in that market since June 20. The November contract dropped $1.71 to $71.73/bbl.

On the US spot market, West Texas Intermediate at Cushing, Okla., was down by $1.55 to $70.62/bbl. Unleaded gasoline for September delivery fell by 11.2¢ to $1.78/gal on NYMEX. Heating oil for the same month lost 6.39¢ to $1.97/gal.

The September natural gas contract dropped 68.5¢ to finish at $6.47/MMbtu, after trading as low as $6.32/MMbtu in that session—the lowest price level for a front-month gas contract since July 21. "Natural gas prices, far more influenced by weather and particularly hurricanes, gave back all of the gains experienced last week," said Raymond James analysts.

In London, the October IPE contract for North Sea Brent crude fell by $1.88 to $70.82/bbl. The September gas oil contract dropped $26.50 to $631.75/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 11 benchmark crudes lost $2.07 to $66.03/bbl on Aug. 28.

Contact Sam Fletcher at [email protected].