by Jerome a Paris
Mon Aug 29th, 2005 at 07:09:21 AM EST
We are all holding our breath waiting to know what will happen to New Orleans and the surrounding area, but one thing is certain: the impact on the oil markets is already very real, and is set to get worse.
Oil prices have jumped above 70$/bl in Asian and European trading and will evolve as more news come on what wqill happen to the massive oil production, transportation and refining infrastructure in the NO area.
Some recent news below, as well as some background on the refining industry in the US. I'll try to update throughout the day.
Oil breaches $70 as hurricane heads for New Orleans
Crude oil prices were swept to new nominal highs on Monday as Hurricane Katrina forced the shut down off some 40 per cent of Gulf of Mexico production and raised the spectre of disruption to refining.
Front-month US light crude rose around $5 a barrel to $70.80 in Asian trading but slipped back to $69 later. Gasoline and heating oil prices were also higher.
There are concerns that the storm might not just cause short-term closures of facilities but longer-term damage. With little spare production capacity globally, particularly of oil suitable for US refineries, that might bring more sustained pressure on the market. Already some in the US are debating whether the White House should consider releasing stocks from the Strategic Petroleum Reserve.
The following article provides more details on what's down already:
Katrina cuts oil output by a third
HOUSTON (Reuters) - U.S. energy companies said U.S. Gulf of Mexico crude oil output was cut by more than one-third on Saturday as Hurricane Katrina appeared poised to charge through central production areas toward New Orleans.
The Gulf of Mexico is home to roughly a quarter of U.S. domestic oil and gas output, with a capacity to produce about 1.5 million barrels per day of crude and 12.3 billion cubic feet per day of gas.
As of Saturday, 563,000 barrels daily crude output had been shut in due to the threatening storm.
Chalmette Refining LLC, which operates a [190,000-bpd ] New Orleans-area refinery, was shutting down production in preparation for the approach of the hurricane. (...) Other southeast Louisiana refineries were operating on Saturday but were reducing staff and preparing for possible shutdowns, the companies said.
Ship traffic along the Mississippi River from the Gulf of Mexico to New Orleans was halted on Saturday when ship pilots said conditions were already unsafe to continue moving vessels along the waterway.
The Louisiana Offshore Oil Port LLC stopped offloading tankers in the Gulf of Mexico at midday on Saturday. The LOOP, which is the only U.S. offshore oil port, takes an average 1 million barrels in foreign crude from tankers in the Gulf.
So, and even before the hurricane as actualyl struck:
- 600,000 b/d of domestic production is out;
- 1,100,000 b/d of import capacity has shut down.
That means that about 8% of the daily US consumption is missing already
About 1,000,000 b/d or refining capacity is also closed. While this cannot necessarily be added to the above disruption, it does means that BOTH the production/import capacity and the refining capacity must get back to normal for the market to stabilise.
This site provides an estimate of the overall impact of Katrina (put at 13 million barrels altogether, most of it in the first 10 days). I don't know how reliable this is, but it does provide fairly detailed numbers for each producer.
Of course, this comes in a context when the oil market was already unusually tight, as shown in the graph above and as discussed in my previous "countdown" diaries (see links below), and where the downstream sector (refineries) is also in a tense situation, as described in this timely Financial Times article this morning:
America's oil refineries are being caught over a barrel
Oil refineries in the US - where there has been no large investment for more than a quarter of a century - are working flat out to meet growing demand, a task made harder over the weekend by Hurricane Katrina, which forced facilities on the Gulf Coast to close. Things are so tight that even minor accidents and normal maintenance shutdowns are causing price spikes.
"We're stretched to the limit," says Gene Edwards, senior vice-president of marketing and supply for Valero, a top US refiner. "We have had to run harder and harder the last few years to meet demand."
But supply looks set to get even tighter - and prices even higher - when new fuel specifications in the US energy bill come into effect next year. The bill omits limited liability protection for MTBE, a petrol additive that pollutes groundwater.
Valero, one of the biggest US refiners, will stop producing the additive, pulling 60,000 barrels a day of petrol from the US market. The company says that is equivalent to losing the output of a large-scale refinery.
If other companies follow - and Sunoco says it will - the market could lose 258,000 barrels a day - equivalent to the production of several world-class refineries.
Over the years, refiners have spent billions of dollars converting systems to meet government requirements. As a result, they are reluctant to commit the $3bn needed to build a new refinery.
Indeed, the last US refinery to be built from scratch was two decades ago. "Even when we've been able to add capacity, it has not been enough to keep up with the demand increase each year," says Bob Slaughter, president of the National Petrochemical & Refiners Association. The US, which began importing fuels in the 1940s, now brings in about 10 per cent of its petrol.
(...) many are wary of investing too heavily, fearing demand will drop. "There is a disagreement within the industry as to whether we're in a whole new paradigm or if returns on refining investment will revert to the norm," Mr Slaughter says.(...) It is a consideration on which two of the largest refiners - Valero and ExxonMobil - take opposing views.
Bill Greehey, Valero chairman and chief executive, believes that once capacity under construction comes on line in a few years, margins will decrease from today's highs, but returns on investment will still "be great". (...) Edward Galante, senior vice-president of Exxon-Mobil, believes there is a "long-term, downward trend", with many predicting US oil demand will peak in 15 to 20 years.
If cash refining margins stay above $10 a barrel (...) then refiners such as ExxonMobil may not be able to drag their heels much longer. "There will be pressure on US refiners to expand capacity."
There are some real issues in the refining world:
- the US has a patchwork of State-by-State regulations that prevent the emergence of a national supply market and make locla disruptions more frequent;
- increasingly tough regulations have meant that investments in the sector have gone to quality improvements rather than quantity enhancements. While this is generally a good thing, it does have a cost, which is now apparent in the tight supply market;
- the sector was burnt badly by overcapacity in the last wave of investment 25 years ago (after another price shock) and was not a money spinner until a couple of years ago. Some are happy to wait and cash in today, but it can be understandable that there is reluctance to invest in a 25+ years asset on the basis of 2-3 years of good prices.
In the meantime, supplies are tight, and the supply disruption caused by Katrina will require demand destruction to match it. Some of that can come from stocks, but demand will have to go down. That will require that the inconvenience of alternatives (wlaking, carpooling taing the bus, not travelling, etC...) becomes more bearable than the price to fill up. Of course, that pain will be borne mostly by the poor, especially in rural areas, which makes it a legitiamte political topic for the Democrats.
But we are all paying the price of 20 years of neglect, and thinking that market forces can anticipate such events, and that the low prices of the past meant that everything was dandy - and that we could build our whole car civilisation (exurbs, commutes, the car industry, etc..) around such low prices.
Earlier "Countdown Diaries":
Countdown to 100$ oil (12) - Al-Qaeda, oil and Asian financial centers
Countdown to 100$ oil (11) - it's Greenspan's fault!
Countdown to 100$ oil (10) - Simmons says 300$ soon - and more
Countdown to 100$ oil (9) - I am taking bets
Countdown to 100$ oil (8) - just raw data
Countdown to 100$ oil (7) - a smart solution: the bike
Countdown to 100$ oil (6) - and the loser is ... Africa
Countdown to 100$ oil (5) - OPEC inexorably raises floor price
Countdown to 100$ oil (4) - WSJ wingnuts vs China
Countdown to 100$ oil (3) - industry is beginning to suffer
Countdown to 100$ oil (2) - the views of the elites on peak oil
Countdown to 100$ oil (1)