Monday Morning September 1, 2008
With Gustav just an hour or so away from making landfall energy prices are surprisingly subdued. The projected path (see below) of Gustav shows it making landfall around Terrebonne Parish, La with an intensity of something between a category 2 and 3. It will be about the same strength as when Hurricane Katrina hit New Orleans. So far all indications are that over 90% of the coastal residents have already evacuated so a repeat of the human problems that occurred during Katrina & Rita do not look likely.
On the energy front it is too early to tell if there will be any permanent/long lasting impact to the infrastructure. We will probably not know the extent of damage until well into tomorrow. One thing we do know is a significant amount of offshore oil and NG production has been shut in for several days. As shown in the following table produced daily by the Minerals Management Service ( www.mms.gov) almost 1 million barrels per day of oil and 2,750 mmcf per day of NG have been shut in. The shut-in is based on preventive procedures by the energy industry and to the extent that Gustav passes with little damage production will be ramped up pretty quickly. However, even if there is no damage we can expect to see both oil & NG inventories declining over the next 2 to 4 weeks.
Mineral Management Service Latest Gulf Of Mexico Update Districts Lake Lake Lafayette Houma New Total Jackson Charles Orleans Platforms 11 43 53 42 74 223 Evacuated Rigs 4 6 6 17 12 45 Evacuated Oil, BOPD 11,436 9,206 113,557 359,748 504,074 998,021 Shut-in Gas, 123 104 528 345 1,650 2,750 MMCF/D Shut-in
Once the damage assessments are made if required the SPR will make crude oil available to refiners who need it. Depending on the damage, if any to the refining sector any major product shortfall would most likely result in the IEA triggering their sharing mechanism which would make refined products available to the US. The IEA triggers their sharing mechanism if there is an oil shortfall of 7% or more. Barring any severe damage the current inventory situation heading into the hurricane is very adequate to handle minor interruptions in supply.
The other storm, Hanna, that we discussed last week has taken a strong turn to the north as shown in the following projected path chart, and is now headed to the south east coast. This path takes it away from any oil or NG infrastructure but now puts people in those states in the path of jeopardy. For now we will suspend discussions on Hanna unless it turns once again and heads toward the oil & NG rich Gulf of Mexico.
In other news this morning the dollar is trading a bit stronger putting some additional downside pressure on oil prices. Prices remains within our predicted trading range as has been the case throughout most of the month of August and are now once again approaching the lower support levels shown in the table at the end of the report. With a combination of the market sentiment still decidedly bearish, the fundamentals (pre Gustav assessment) well supplied, demand on the defensive and the dollar continuing to show more and more signs of strengthening we would expect to see prices testing the lower support level and possibly breaching these levels in the next week or so (assuming no severe hurricane damage to the energy infrastructure).
Finally we now need to start paying attention to the next major event that could impact energy prices…the September 9th OPEC meeting in Vienna. So far most of the comments circulating in the media from a few OPEC nations indicate a rollover agreement or no decrease in the current OPEC production levels. However we need wait and see if Saudi Arabia makes any pre meeting comments as usually what they say in the press normally has a very high probability of what will be the outcome.
An hour or so away from landfall energy prices are lower while the dollar is a bit firmer.
Current Expected Trading Range Expected Trading Range 9/1/08 Change Low High End From End Support Resistance 7:51 AM Yesterday Oct WTI $113.87 ($1.59) $110.00 $121.50 Oct HO $3.1746 ($0.0173) $3.0700 $3.3500 Oct RBOB $2.8400 ($0.0142) $2.8100 $3.1000 Oct NG $7.669 ($0.274) $7.000 $8.000 Euro/$ 1.4607 (0.0024) 1.5290 1.5550 Yen/$ 0.9281 0.0079 0.9200 0.9470
Best regards,
Dominick A. Chirichella
Energy Management Institute
The Energy Management Institute operates a fleet of daily, weekly and biweekly energy publications covering various angles of the energy market, including over a decade of natural gas and power price indexing. In addition, EMI provides higher learning for energy professionals with comprehensive, fully accredited, energy education programs from basic to advanced level. It also provides critical business information services and thought leadership in the energy segments of Oil, Gas, Power, Alternative Fuels, soft commodities and metals.
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