MARKET WATCH: Energy prices rebound on Fed action

Sam Fletcher
Senior Writer

HOUSTON, Aug. 20 -- After a volatile week of seesawing prices, energy futures rebounded Aug. 17 primarily because of the US Federal Reserve's efforts to ease a credit crunch, rather than in response to the first hurricane of the 2007 season in the Caribbean.

"The market rallied after the Fed lowered the discount rate by 0.5% premarket," said analysts in the Houston office of Raymond James & Associates Inc. "This was a much-needed boost for the stocks that were hammered earlier in the week. The Dow Jones Industrial Average gained 1.8% and the Standard & Poor's 500 rose 2.2% as the broader market welcomed the Fed's decision with open arms."

Meanwhile at 11 a.m. EDT on Aug. 20, Hurricane Dean was some 125 miles southwest of Grand Cayman, moving west at 21 mph. It was described as a strong Category 4 storm on the Saffir-Simpson scale, with sustained winds of 150 mph. It will top the scale as a Category 5 storm once its sustained winds exceed 155 mph.

Most computer weather models predict Dean will hit Mexico's Yucatan Peninsula early Aug. 21. It could weaken to a Category 1 storm as it moves overland, but it is likely to reintensify when it moves back over open waters in the Gulf of Mexico. Most forecasters predict the storm will move into north-central Mexico on Aug. 22. However, government officials in Texas and Louisiana are making full-scale preparations in case Dean turns north.

Raymond James analysts said, "Most of the majors [oil companies] are not evacuating platform workers, and others are keeping all essential employees in the gulf. The forecasts now suggest that the US oil and gas infrastructure in the gulf are now safe as the Category 4 storm heads towards Mexico."

On the other hand, the storm has forced Petroleos Mexicanos, Mexico's national oil company, to shut down 140 rigs and move 1,300 workers to land. "It is expected to move towards the Bay of Campeche, where 66% of Pemex's oil production is located. Premarket, gas is trading over 8% lower on the news and oil is down about 1%," said Raymond James analysts Aug. 20.

As of midday Aug. 19, the US Minerals Management Service in New Orleans reported workers had been evacuated from 6 of the 834 manned production platforms and from 3 of the 101 drilling rigs working in the US sector of the Gulf of Mexico. Roughly 23,000 b/d (1.8% of normal oil output from the gulf) and 54 MMcfd (0.7% of usual natural gas production) were shut in by Aug. 19.

Officials at Shell Oil Co. earlier said they evacuated 380 offshore workers on Aug. 18, and were scheduled to bring ashore another 200 on Aug. 19. However, a company spokesman Aug. 20 said, "Due to high confidence in the Hurricane Dean storm track over the next several days, we are suspending any further personnel evacuations at this time." Shell said it shut in gulf production of 39,000 b/d of crude and 97.5MMcfd of gas. However, officials said, "No further production shut-ins are expected in regard to Dean and we will begin to bring production that was shut in due to long lead times back on line."

Still, they will continue to monitor Dean, as well as Tropical Disturbance No. 37 that "may potentially impact portions of the eastern Gulf of Mexico late this week into next week," said Shell officials.

Energy prices
The September contract for benchmark US light, sweet crudes jumped 98¢ to $71.98/bbl Aug. 17 on the New York Mercantile Exchange. The October contract gained 95¢ to $71.82/bbl. On the US spot market, West Texas Intermediate was up 98¢ to $71.99/bbl. The September contract for reformulated blend stock for oxygenate blending (RBOB) escalated by 6.05¢ to $2.04/gal on NYMEX. Heating oil for the same month increased 3.44¢ to $2.02/gal.

The September natural gas contract bounced up 13.5¢ to $7.01/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., gained 15.5¢ to $7.14/MMbtu.

In London, the October IPE contract for North Sea Brent crude increased 67¢ to $70.44/bbl. The September gas oil contract jumped by $10.25 to $627/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 11 reference crudes increased by 16¢ to $67.77/bbl on Aug. 17. So far this year, OPEC's basket price has averaged $62.09/bbl, up from $61.08 for all of 2006.

Contact Sam Fletcher at [email protected].