Oil, gas prices leap on approach of Hurricane Rita

Sept. 26, 2005
Futures contracts for natural gas and benchmark US light, sweet crudes registered the biggest 1-day gains ever on Sept.

Futures contracts for natural gas and benchmark US light, sweet crudes registered the biggest 1-day gains ever on Sept. 19 as Hurricane Rita roared into the Gulf of Mexico along much the same path taken 3 weeks earlier by the destructive Hurricane Katrina.

The October natural gas contract spiked by $1.52 to a record closing price of $12.66/MMbtu on New York Mercantile Exchange. Crude for the same month escalated by $4.39 to $67.39/bbl. Energy prices retreated Sept. 20, to $66.23/bbl for crude and $12.49/MMbtu for gas, but kept most of the previous session’s gains as the Organization of Petroleum Exporting Countries promised to release its remaining 2 million b/d of spare production capacity for a period of 3 months, starting Oct. 1-if necessary.

Many analysts and political leaders outside of OPEC had expected the group to hike its production ceiling by 500,000 b/d to 28.5 million b/d during its 2-day meeting in Vienna. OPEC production currently is estimated at 28.3 million b/d for members subject to quotas and 30.2 million b/d with Iraq.

However, OPEC members noted that high production among that group “has led to a build-up [among consuming countries] in inventory levels, especially of crude, which now stand well above their 5-year average, sufficient to ease concerns in the market about potential supply disruptions such as those witnessed following Hurricane Katrina.”

Some observers said OPEC’s alternative action effectively suspends its production quota, currently 28 million b/d, for only the second time in the group’s history, the first occurring in 1990 when Iraq invaded Kuwait.

Saudi Arabia is the OPEC member with the spare production capacity, which is primarily sour crude with a high sulfur content that cannot be processed by many refiners. Recent efforts by both Saudi Arabia and the US Department of Energy to market sour crude found few buyers.

Various analysts said there was no need for OPEC to increase production, especially of sour crude, when the real problem is the lack of refining capacity.

Refinery problems

Four Gulf Coast refineries-Chevron Corp. in Pascagoula, Miss.; ConocoPhillips, Belle Chasse, La.; ExxonMobil Corp., Chalmette, La; and Murphy Oil Corp., Meraux, La.- with a combined capacity of 900,000 b/d, or 5% of total US refining capacity, remained shut down last week because of damage from Hurricane Katrina (OGJ Online, Sept. 13).

At Pascagoula, Chevron repaired a damaged product berth and resumed movement of products from that site to its Collins, Miss., terminal and to the Plantation Pipeline for delivery to terminals and markets in the southeastern US. The company received 11.5 million gal of regular grade gasoline Sept. 16 from a European supplier and was prepared to import additional shipments of gasoline, diesel, and jet fuel as needed to supply customers.

However, Chevron was still assessing damage to the refinery itself and didn’t expect to start up a processing train at that site until mid-October. It said it would be mid-November before the refinery was fully operational.

While assessments and repairs progressed on the four refineries still idle because of Hurricane Katrina, the approach of Hurricane Rita jeopardized major processing centers along the Texas Gulf Coast.

The area has four concentrations of refineries with capacities totaling 4 million b/d, about 23% of total US refining capacity. There are four refineries in the Beaumont-Port Arthur area with combined capacity of 1 million b/d, six in and around Houston with 1.6 million b/d, three in Texas City with 740,000 b/d, and four in Corpus Christi with 690,000 b/d.

On Sept. 21, Hurricane Rita was gathering strength in the Gulf of Mexico and was projected to come ashore by the end of the week near Galveston, south of Houston. Refineries in the Houston area continued normal operations even as workers began securing facilities and implementing plans for systematic shutdowns before the storm reached landfall. Galveston began mandatory evacuations. That city was virtually wiped out by a hurricane that killed 6,000 people in 1900.

Offshore preparations

Offshore workers still struggling to restore oil and natural gas production in the Gulf of Mexico shut in by Katrina again were forced to evacuate offshore facilities ahead of Rita. The US Minerals Management Service reported 69 rigs and 469 platforms evacuated through Sept. 21, including 2 rigs and 83 platforms to which crews had not yet returned following Katrina. Shut-in production increased to 1.1 million b/d of crude and 4.7 bcfd of natural gas. That’s equivalent to 73.16% of the normal oil production and 47.13% of the normal gas production from the gulf. Cumulative offshore production lost Aug. 26-Sept. 20 totaled 27.1 million bbl of crude and 125.2 bcf of gas, said MMS.

“While the peak daily loss in crude oil production during Hurricane Dennis [earlier this year] was slightly more than suffered following Hurricane Katrina, within a week of the peak loss, crude oil production following Hurricane Dennis was back to normal while it will likely be months before crude oil production is back to normal following Hurricane Katrina,” said DOE officials.

MMS officials said, “The major hindrances to restoration of energy resources have been damage to onshore infrastructure, such as refineries, processing plants and pipelines; difficult and intermittent communications in the gulf region; shortage of helicopters, boats, divers and power.”

Inventories increase

Commercial US inventories of crude inched up by 300,000 bbl to 308.1 million bbl during the week ended Sept. 16, the Energy Information Administration reported Sept. 21. Distillate fuel stocks increased by 800,000 bbl to 134.1 million bbl, while gasoline inventories jumped by 3.4 million bbl to 195.4 million bbl.

Imports of crude into the US increased by 704,000 b/d to 9.8 million b/d during the same week. Input of crude into US refineries gained by 660,000 b/d to 15.3 million b/d with refineries operating at 90.8% of capacity. Gasoline production rose substantially in the latest period, and distillate fuel also was up, EIA said..