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Oil Prices Rise After Katrina's Devastation: ; Traders Await Damage Reports From Storm

Posted on: Thursday, 1 September 2005, 00:00 CDT

VIENNA, Austria - The effects of Hurricane Katrina sent oil futures higher again today, as traders awaited damage reports from U.S. oil and gas refineries in the Gulf of Mexico.

Analysts said that even if Katrina did less harm than feared, its effects were bound to tighten the availability of already scarce refined products, thereby driving prices up further.

Gasoline and heating oil, which hit new closing highs on the New York Mercantile Exchange on Monday, continued their upward climb on Tuesday. A gallon of unleaded gas was fetching $2.0950 at midday in Europe, up more than 3 cents. Heating oil rose by nearly 2 cents, selling at $1.9255 a gallon.

Light, sweet crude oil for October deliver was at $67.90 a barrel, up 70 cents, in electronic trading on the Nymex. Prices are more than 50 percent higher than a year ago.

On London's International Petroleum Exchange, October Brent spiked $1.38 from Friday's settlement price to $66.25 a barrel. The IPE was closed Monday for a British banking holiday.

On Monday, Nymex futures jumped to an intraday record of $70.80 a barrel on signs that Katrina would barrel into U.S. facilities that account for a third of U.S. crude and a quarter of its natural-gas supplies. Prices fell back to close at $67.20 a barrel on reports that the Bush administration might release crude from the U.S. Strategic Petroleum Reserve.

But some analysts on Tuesday brushed aside such a move, saying the problem is not supply but refining capacity in the U.S., where refineries have been running near full output all year.

"The release of crude out of the Strategic Petroleum Reserve is not as critical as making sure that there is enough refined product supply and that there are refineries to process the crude," said analyst Victor Shum from Texas-based consultants Purvin & Gertz.

"Even if there's available crude for release, if there's no refining capacity that they can use, what good is that?" Shum said.

At least eight Gulf Coast refineries in the path of Hurricane Katrina shut down or reduced operations Monday, according to company and federal reports. However, several others, including one of the largest - Exxon Mobil Refining & Supply Co.'s Baton Rouge, La., refinery - had not been affected by the storm or had resumed normal operations by late Monday.

Katrina, which had been ranked as high as a Category 5 storm, was blamed for at least 55 deaths and the evacuation of more than 700 offshore platforms and rigs. It slammed into a major oil production hub at a time when producers worldwide were already struggling to cope. The latest storm of the Atlantic hurricane season now threatens to constrain the supply of home heating fuels for the North American winter, a season of traditionally high demand.

Organization of Petroleum Exporting Countries secretary general Adnan Shihab-Eldin reiterated Tuesday that the group will supply extra barrels of crude oil to refiners if they want them. Previous OPEC pledges have done little to ease market fears over supply.

But Venezuela, the world's fifth-largest exporter and OPEC member, said the cartel did not have the capacity to add barrels quickly enough to calm markets. Analysts also say OPEC can mostly add sour heavy crude to the market, while light, sweet crude was more in demand and easier to refine for products.

"The pain is in products. Refineries preemptively shut in some 2 million barrels a day, cutting gasoline output by 1 million barrels a day," said Enerygintel analyst John van Schaik. "And the hurricane season is not over yet."

A JPMorgan report released Tuesday said Katrina has already forced a production halt of about 630,000 barrels of crude a day from the Gulf of Mexico, 12 percent of daily output. That figure is likely to rise significantly in the coming days once assessments are made, analysts say.

The U.S. Minerals Management Service said Monday that 92 percent of the region's oil output was shut-in, or shut down, with more than 3 million barrels of production lost so far since Friday. The agency said 83 percent of natural gas output was shut-in, resulting in a loss of 15.5 billion cubic feet of production since Friday.

The Gulf of Mexico normally produces 2 million barrels of crude oil a day and about 10 billion cubic feet a day of natural gas.

Vienna's PVM Oil Associates warned that the shutdowns and "time- consuming restart procedures will deepen the 11-million-barrel deficit in gasoline stocks and eat into the 5.5-million-barrel cushion in heating oil stocks."

Reports from Citigroup Global Markets Inc. and ING on Tuesday warned of the impact that high oil would have on some Asian economies, which are already struggling from exchange-rate worries and inflationary pressures outside of energy concerns.

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Source: Charleston Daily Mail

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