Katrina’s effects seen lasting into 2006

Sept. 19, 2005
“Hurricane Katrina has wreaked havoc on US energy markets, and we believe its effects are likely to impact energy prices into 2006,” said analysts at Jefferies & Co.

“Hurricane Katrina has wreaked havoc on US energy markets, and we believe its effects are likely to impact energy prices into 2006,” said analysts at Jefferies & Co. Inc. in a Sept. 6 report. “Over the long term, the spike in crude oil and petroleum product prices will likely push the American consumer to reduce his consumption behaviors.”

The analysts wonder, “At what point and to what extent will the current high oil prices begin to have a significant impact on economic expansion and therefore petroleum product demand.”

US demand for petroleum products “appears to have been negatively impacted in the past when spending on oil products as a percentage of gross domestic product reached about 0.7%. Currently, this ratio is at 0.8%, although given that the US economy is becoming less oil-intensive, it is likely to be more resilient to higher oil prices than it was in the past,” said Jefferies analysts. For more than a year, market prices for West Texas Intermediate crude have remained above $40/bbl, “and global economy appears to have adjusted well to prices at those levels,” the analysts said.

But the International Energy Agency noted that US demand for oil products was flat in the second quarter, year-over-year, after being up 1% in the first quarter.

“While difficult to quantify, we believe high prices are already having a moderate impact on US economic growth,” Jefferies analysts said.

Still, for the short-term, they said, “The combination of supply outages and only modest demand destruction will be enough to keep oil prices at or above $50/bbl over the next few years.” To reflect the recent price spike as a result of production losses caused by Hurricane Katrina, Jefferies boosted its projections of WTI prices to $58/bbl from $54/bbl for 2005 and to $54/bbl from $50/bbl in 2006. Its average price forecast of $50/bbl for 2007 and $45/bbl for 2008 remained unchanged.

“We are also raising our US natural gas price projections to $7.75[/MMbtu] from $6.80 in 2005 and to $7[/MMbtu] from $6.20 in 2006,” the analysts said.

Hurricane damage

“While details are still emerging, it appears that Hurricane Katrina caused significantly more damage to offshore oil and gas production facilities compared [with] Hurricane Ivan last year,” Jefferies analysts reported. The US Coast Guard indicated 26 offshore production platforms were destroyed, and 18 others sustained damage.

“It appears that Shell’s Mars deepwater platform has sustained significant damage. In addition, we have heard that Shell’s West Delta 143 platform, which acts as the onshore host for several deepwater facilities, has suffered damage. The extent of downtime on the 143 platform could impact deepwater production more than we are currently estimating in 2005, depending on the severity of the damage,” Jefferies said.

“Ultimately, we believe Katrina will remove 60 million bbl of oil from the market in 2005, and US crude oil output may be reduced by 200,000-300,000 b/d in 2006 due to damage to important platforms and pipelines, eliminating another 75-100 million bbl of crude oil supplies from US markets next year,” the analysts said.

Those supply losses would be offset by the release of up to 90 million bbl of Strategic Petroleum Reserves from the US and Europe over the short term but ultimately will create demand later as those released volumes are replenished.

“Furthermore, while half of the 1.75 million b/d of refining capacity will make it back on stream over the coming weeks, certain other refineries (Pascagoula and

Chalmette) might take much longer to restart,” the analysts said.

US inventories

The US Energy Information Administration said Sept. 8 that commercial US crude inventories plummeted by 6.4 million bbl to 315 million bbl in the week ended Sept. 2 because of production and import disruptions by Hurricane Katrina. US gasoline stocks fell by 4.3 million bbl to 190.1 million bbl in the same period. Distillate fuel inventories declined by 800,000 bbl to 134.4 million bbl.

Analysts at Friedman, Billings, Ramsey & Co. Inc. said: “Given that approximately 20% of US refining capacity was either completely shut down or operating at reduced rates, we question the accuracy of these numbers and expect inventory levels to be revised down in the coming weeks as better data are received. By themselves, the four refineries that were down all week and significantly damaged (and could be closed for a few months) produce approximately 5 million bbl/week of refined product. We maintain our view that the inventory loss related to Hurricane Katrina should support high refining margins through at least 2006.”

(Online Sept. 12, 2005; author’s e-mail: [email protected])