MARKET WATCH: Energy prices fall as Dean heads for Mexico

Energy prices fell Aug. 20 as Hurricane Dean headed for Mexico's Yucatan Peninsula, away from offshore oil and gas operations in the US sector of the Gulf of Mexico.

Aug 21st, 2007

Sam Fletcher
Senior Writer

HOUSTON, Aug. 21 -- Energy prices fell Aug. 20 as Hurricane Dean headed for Mexico's Yucatan Peninsula, away from offshore oil and gas operations in the US sector of the Gulf of Mexico.

The September contract for reformulated blend stock for oxygenate blending (RBOB) dropped 10.23¢ to $1.94/gal on the New York Mercantile Exchange. Natural gas for the same month plunged 97¢ to $6.04 MMbtu—"the steepest decline in over 4 years," said analysts in the Houston office of Raymond James & Associates Inc.

Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland, said, "A 5% drop in RBOB futures would have made the top of the list any other day but [on Aug. 20] this was pale compared to the 14% daily loss on natural gas. The Hurricane season is far from over but given time necessary for storm development it means that the peak summer demand season will probably have escaped storm disruptions to US oil assets. We will have to wait for [Aug. 22] before knowing if Dean has caused any damages to the Mexican oil assets upon entry into the Bay of Campeche."

Hurricane Dean had strengthened into a Category 5 storm with 165 mph winds when it made landfall Aug. 21 near Majahual, Mexico, at 4:30 a.m. EDT. Moving west-northwest at 20 mph, Dean was expected by evening to reach the southern Bay of Campeche where the state oil company Petroleos Mexicanos has 66% of its oil production. Pemex reportedly evacuated more than 14,000 workers from 140 offshore facilities and has shut in production of 2.65 million b/d of oil and 2.63 bcfd of natural gas.

The US government said it is prepared to make emergency oil loans from the Strategic Petroleum Reserve to US refineries to help offset any loss of Mexican crude. Mexico was the third-largest oil supplier to the US in May, after Canada and Saudi Arabia.

The US Minerals Management Service reported Aug. 20 that workers were evacuated from 10 of the 834 manned production platforms and 24 of the 101 rigs in the US sector of the gulf. Operators have shut in 41,967 b/d, or 3.2% of normal crude production and 100 MMcfd, 1.3% of usual gas production from the US sector of the gulf.

Dean is projected to move into north-central Mexico on Aug. 22, although perhaps not at Category 5 strength. Meteorologists say Category 5 hurricanes are extremely rare, and only three have hit the US since record-keeping began. Dean's outer bands are likely to bring more rain and flooding to South Texas, which might affect rig movements.

Energy prices
The September and October contracts for benchmark US light, sweet crudes both lost 86¢ Aug. 20 on NYMEX, closing at $71.12/bbl and $70.96/bbl, respectively. On the US spot market, West Texas Intermediate at Cushing, Okla., was down 86¢ to $71.13/bbl. Heating oil for September delivery lost 3.64¢ to $1.98/gal on NYMEX.

Jakob said, "Product cracks have given back most of their pre-Dean gains, especially on RBOB gasoline where the front time-spread is under severe pressure." He said benchmark crude on NYMEX "is lacking a catalyst to move higher unless Dean manages some Mexican disruptions."

On the US spot market, natural gas at Henry Hub, La., dropped 71¢ to $6.43/MMbtu.

In London, the October IPE contract for North Sea Brent crude declined 59¢ to $69.85/bbl. Gas oil for September lost $10 to $617/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 11 reference crudes dipped 8¢ to $67.69/bbl on Aug. 20.

Contact Sam Fletcher at samf@ogjonline.com.

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