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Monday, August 29, 2005

Katrina: Oil and Gas

by Calculated Risk on 8/29/2005 06:57:00 PM

Luckily hurricane Katrina weakened before it came onshore and the "worst case" scenario was avoided, however there still appears to be severe damage and widespread devastation. My thoughts are with the victims of this massive storm.

Early estimates are that Katrina will be one of the most expensive hurricanes to ever hit the US. Although the damage is major, the economic impact on the United States will be from any significant damage to the oil infrastructure on the Gulf Coast. It will take some time to assess the damage to refineries, and oil and gas production facilities. We are starting to see stories like this:

Valero sees re-opening refinery in Louisiana in 1-2 weeks (VLO) By Carla Mozee
SAN FRANCISCO (MarketWatch) -- Valero Energy Corp. (VLO) said Monday evening that it expects to re-open its St. Charles refinery in Louisiana in one to two weeks. The company said that the refinery is now without power and that it may take two to three days for it to return. It also said that there is 3 feet of flood water in two units and that it may have to repair pumps, electric motors and electrical switchgear. Valero also sees minor damage to its cooling towers. The company said that no major damage is apparent and there's no evidence of spills or leaks.
And some good news on Natural Gas: Henry Hub reopens for delivery
A potential crisis in the natural-gas markets was apparently averted Monday after the company operating the Henry Hub gas gathering facility said it avoided major damage from Hurricane Katrina and reopened the site for delivery and receipt.
But a couple of cautionary comments from this story:
"After Ivan hit, the initial word was that it wasn't that bad." [said Bob Slaughter, president of the National Petrochemical and Refiners Association].
"Our goal is to get back up as soon as possible, but do it safely. It took almost a year to get back up to full production after Hurricane Ivan," [said Tony Lentini, spokesman for Apache Corp].
Oil, natural gas and gasoline futures all soared as Katrina appeared to be the storm of the century, and settled back when the damage was less severe than initially feared. Still, from Friday's closing prices, oil is up 2%, gasoline 8% and Natural Gas 18%. On Friday, I pointed out that oil inventories were solid (see Dr. Hamilton's Supply factors in the 2005 oil price surge), but gasoline stocks were tight.

Click on graph for larger image.

This graph is from the DOE.

We will not know the extent of the damage to refineries for several days, but the US can expect a price spike at the pumps on top of already record gasoline prices. One prediction:
"One analyst said pump prices nationwide would likely average more than $2.75 a gallon by week's end — up from $2.61 a gallon last week"

Meanwhile crude stocks are robust and well above the average range. Plus the White House has suggested that oil could be released from the Strategic Petroleum Reserve if needed.

It is difficult to make any predictions, especially with stories of oil rigs adrift. But with above average oil stocks, it appears there will be no short term crude oil supply issues.

Gasoline is a different story. And there might be concerns about adequate heating oil supplies too.