1. Gustav and prices
As it became apparent that hurricane Gustav would cause minimal damage to the Gulf oil infrastructure and that any lost production would be made up from emergency stocks, oil prices began to drop and continued dropping all week. Despite the near total shutdown of oil and natural gas production in the Gulf and the temporary closing of most Gulf oil ports in preparation for the hurricane, the oil markets continued to focus on a weakening economy and a strengthening dollar to send oil down to a $107.89 close on Thursday – the fifth straight session with a lower close.
This week’s stocks report, which was released on Thursday due to the holiday, showed crude stocks falling by 1.9 million barrels, gasoline stocks by 1 million barrels and distillate stocks by 400,000 barrels. Demand for gasoline in August averaged 1.6 percent lower than in 2007. Jet fuel demand is 9.7 percent lower and overall petroleum consumption is down by 3.5 percent as compared to last year.
While the hurricane did relatively little damage to oil production and processing facilities, it devastated the electric power distribution system in Louisiana so that much refining capacity and many pumping facilities remain out of service. As of Thursday afternoon, the US Minerals Management Service reported that 1.24 million b/d, or well over 90 percent, of Gulf crude production was still shut-in after being closed down last weekend. Twelve refineries, capable of 1 million b/d of gasoline and 700,000 b/d of distillate production, remained closed and another six are operating at reduced capacity.
The Capline crude pipeline to the Midwest is still down, but is expected to begin pumping with the help of emergency generators shortly. The Colonial and Plantation pipelines that move gasoline and other products to cities along the east coast are operating at reduced levels due to inadequate electric power and a lack of product to move.
With nearly all of the Gulf’s oil production closed in for most of this week, and considerably lower refining activity taking place in Louisiana, next week’s petroleum status report will give a better picture of the US energy situation. It could turn out over the next week or so that Gustav did more damage to the US oil supply than the markets initially perceived. As of last Friday, gasoline stocks, particularly along the Gulf Coast, were very low. It now seems likely that the US will lose at least 1 million b/d of refined gasoline for a week or more plus whatever gasoline imports were delayed while the ports were shut.
All this suggests that Gulf and east coast gasoline supplies are getting very close to the level at which shortages could begin.
