First the overall view after the first phase of damage assessment indicates that the impact on the energy infrastructure has been minimal. There does not appear to be the massive wind and flooding damage to US refineries seen after Hurricane Rita. Following are the major highlights as of late Sunday:
· There are 15 refineries in Texas & Louisiana with a capacity of 3.9 million bpd (22% of US capacity) that remain shut due to the effects of the hurricane. Fortunately the major problem in starting these refineries will be dependent not on infrastructure damage but rather when electricity is restored. This could be anywhere from 1 to 4 weeks depending on the area.
· So far since refineries first shut down preventively for Gustav there has been over 24 million barrels of refined products that have not been produced consisting of about 11 million bbls of gasoline and 8 million bbls of distillate HO/Diesel.
· Loop has resumed limited deliveries of crude oil from its onshore Clovelly storage facility (holds about 50 million barrels of oil) but tanker off loadings have not yet resumed. We suspect that will occur in the next day or so.
· Colonial and Plantation refined product pipelines are running at reduced rates.
· The latest MMS report shows about 1.3 mbpd (99%) of offshore GOM crude oil still shut-in and 6.8 bcf/day (90%) od offshore GOM Nat Gas shut in.
· There have been no reports of any significant damage to nat gas pipelines or infrastructure.
· Henry Hub is still not accepting gas flows as a result of intermittent power outages.
· 30 natural gas processing plants (with total capacity of over 14 billion cubic feet per day) are shut down and will not resume operations until plant inspections are complete, upstream supply and downstream facilities are operational, and electricity service is restored. Eight plants with a total capacity of nearly 3 billion cubic feet per day have been confirmed as operating at normal or reduced levels. There are 39 major natural gas processing plants in the path of Hurricane Ike with a total operating capacity of over 17 billion cubic feet per day.
· So far the SPR has delivered about 1 million of crude oil as a result of Gustav to several refiners. There are additional requests for oil being processed and I suspect there will be additional requests over the next few weeks. There is absolutely no problem in getting crude oil from the SPR for those refiners that need it.
· The EPA has temporarily waived several product specs in many areas to make supply & logistics operations much smother during the resupply phase.
· The IEA and the United States are jointly assessing the extent of the possible damage on oil and gas production facilities and refinery/gas processing installations. The US Energy Department continues to provide information of lost production of crude oil and refined products to the IEA. The analysis is still going on and may take some time. Only once the full extent of impact of Hurricane Ike and possible losses becomes clear, can it be decided whether a co-operative action of IEA countries will be necessary. If needed, the IEA stands ready to react quickly and to provide oil to the market as it did after Hurricane Katrina in 2005.
· There are about 2.8 million customers without electricity most of which are in Texas (2.5 million).
A spokesman for the joint operations of southeast Texas emergency management agencies said the state's refineries appeared to have escaped the kind of heavy flooding that left plants shut for months after the 2005 hurricanes. As of now any oil or ng problems experienced from the hurricane will be temporary and we should expect most facilities to return to normal operations within the next 2 to 4 weeks. In the meantime the SPR will continue to supplement any needs on the crude oil side while the IEA will activate their sharing mechanism is a shortage of refined products occurs. I do not think there will be any major shortfalls rather we will see a significant decline in inventories that will then take several months to rebuild. Do not forget that although supply has been impacted so has demand as many people remain confined while waiting to return to their homes in the affected areas. The industry dodged a bullet.
The other major story that is evolving is the meltdown of Lehman, the acquisition of Merrill Lynch by Bank of America and the precarious financial situation for both AIG & WaMu bank. Lehman said this morning they are filing for Chapter 11 after several potential investors walked away from the deal over the weekend after the U.S. Treasury's refusal to provide any takeover aid, as it had done six months ago when Bear Stearns faltered and earlier this month when it seized Fannie Mae and Freddie Mac. The situation is rattling Wall Street even as a group of global banks and securities firms announced late Sunday a $70 billion loan program that financial companies can tap to help ease a credit shortage that threatens global financial markets. The ten banks, which include JPMorgan Chase & Co. and Goldman Sachs Group Inc., said they were committing $7 billion each for the pool. The other banks in the pool are Bank of America Corp., Barclays PLC, Citigroup Inc., Credit Suisse Group, Deutsche Bank AG, Merrill Lynch & Co., Morgan Stanley and UBS. The Federal Reserve also beefed up its emergency lending program for investment banks. The central bank announced late Sunday that it was broadening the types of collateral that financial institutions can use to obtain loans from the Fed.
All of this means that equity markets around the world will be under severe pressure today and likely for the foreseeable future. Declining equity markets are putting further pressure on global economies and as far as oil is concerned it will likely translate to further pressure on global energy demand. The Wall Street situation is bearish for oil.
In the nobody currently cares for the moment column:
· Nigeria's main militant group MEND said it bombed a Shell oil facility. After being relatively quiet it seems MEND is back on a program of trying to disrupt oil flow even further. We will need to watch this situation closely as it could reduce the flow of oil from Nigeria (over and above the significant reduction already) if MEND continues act violently once again.
· The price of WTI on the Nymex has been trading below the psychological $100/bbl mark since trading opened early on Sunday morning. The OPEC President has already been quoted in the airwaves that the overproduction cuts announced at the meeting were having no impact on the market. He went on to say that OPEC will need to act more strongly at the next meeting (Dec 17th). It is starting to sound more and more like OPEC is approaching a threshold where they may begin to aggressively support the price of oil by making significant cuts in crude oil production.
As of this writing the Dow is down over 350 points in pre open trading, oil is getting crushed the dollar is firm again after Friday's big decline, confusion still reigns in the Gulf Coast due to Ike and uncertainty is the key word in markets all around the globe. We are certain of only one thing today and that is it will be full of surprises. Volatility will be above average for everything… oil, equities, currencies, etc. Oil & NG are clearly back in their downtrend and are likely to go lower before all is said and done. There will be many snippets floating around the airwaves today that are likely to impact all of the markets some temporarily and others possibly more lasting.
Today is one of those days to sit back and watch unless you truly have something compelling to do. If you chose to trade from the spec side one must stay short with extremely tight stops as price direction can change on short notice today. It could change based on what happens in the ancillary markets like the equities or currency markets. So watch all of them closely. Buy side hedgers should happily remain on the sidelines as we are still not near a stable situation.
Currently energies are lower as the dollar firms versus teh Euro.
| Current Expected Trading Range | Expected Trading Range | |||
| 9/15/08 | Change | Low | High End | |
| From | End Support | Resistance | ||
| 7:43 AM | Yesterday | |||
| Oct WTI | $94.86 | ($6.32) | $92.00 | $100.00 |
| Oct HO | $2.7284 | ($0.2107) | $2.5700 | $2.8300 |
| Oct RBOB | $2.5358 | ($0.2338) | $2.5000 | $2.8100 |
| Oct NG | $7.135 | ($0.231) | $6.920 | $8.000 |
| Euro/$ | 1.4164 | (0.0050) | 1.4000 | 1.4300 |
| Yen/$ | 0.9476 | 0.0202 | 0.9000 | 0.9300 |
Best regards,
Dominick A. Chirichella
Energy Management Institute
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