Hurricane Damage Accounts For Oil Price Rise

An insightful report in the Financial Times posted below ascribes the recent rise in oil prices above $100 to the far greater than expected losses of oil production in the Gulf from hurricane damage.  As the report also mentions, oil prices have risen despite softness in the global economy.  There are many factors influencing the global price of oil, but considering only the hurricane-induced supply decline and the economy-induced demand decline would lead one to expect lower oil prices ahead as the impacts of the hurricanes recede while the impacts of the recession increases.

The hurricanes’ impacts were primarily to reduce refinery output which has resulted in severe gasoline shortages in some markets.  But the less publicized impact has been to take over 500 kb/d of oil production in the Gulf off line as of yesterday.  Cumulatively, 30.3 million barrels have been taken off the market by the hurricanes. “Nauman Barakat, of Macquarie Futures in New York, said the statistics showed that, in spite of reports that Gustav and Ike had caused no damage, “their impact has been devastating if not more”.”

Economic weakness stems from the global credit crunch, the global real estate recession and the global meltdown in stock prices.  Even real estate in the booming Dubai market is starting to feel  pressure from falling prices elsewhere.  Japanese car companies are making plans to cope with very soft car sales globally.  As I discussed briefly yesterday car sales, particularly in the developed world where buying a car is often a discretionary purchase, will be severely limited during the next 2 - 5 years as people increasingly come to understand that motor technologies are morphing from the standard ICE (internal combustion engine) to a plug-hybrid electric technology.

An example of the public’s increased awareness was Chysler’s surprising announcement earlier this week that they will soon offer five different EV and PHEV model cars soon.   As consumers come to expect a new motor technology they will be increasingly reluctant to buy a new car that comes with the old technology.   Since it will take many years for car makers to eliminate the glitches from the new engines and ramp up production, there will not be enough of the new cars available for a number of years to satisfy even a relatively small demand.

In fact, that outlook could be optimistic unless car makers are able to solve the battery cost problem that so far is not a done deal.  The lithium-ion battery that Chysler, General Motors (GM), Nissan, and others are planning to use for their PHEV’s is not yet available at a cost that is comparable with the current motor technology or even only slightly higher.   Rather, the new engines might add as much as $10,000 to the cost of a car using today’s available batteries.  The new cars might not fly off the lots at those prices.   If that happened, car sales could be hampered for an even longer time as consumers avoid the old technologies but are unwilling to pay the cost of the new ones.

The main significance of the car sales problem in regard to the foreseeable price of oil is that it will contribute toward a weak economy for some time, and particularly during the next two years.  That weakness will be increasingly felt over the next year.  The gulf oil production problem, on the other hand, will mostly be solved in the short term - perhaps the next 60 days.  Therefore, other things equal (which they never are) one might expect fairly restrained oil prices for a while.

Oil output losses worse than feared

By Javier Blas in London and Sheila McNulty in Houston

Published: September 26 2008 00:57 | Last updated: September 26 2008 00:57

The amount of oil production losses caused by hurricanes Ike and Gustav in the energy-rich US Gulf of Mexico is far greater than initially predicted, helping to keep prices above $100 (€68, £54) a barrel in spite of slower economic growth.

Refineries have been particularly badly hit, with a lack of power slowing their return to operation. The output drop is forcing fuel distributors to draw down the country’s gasoline stocks to the lowest level in 41 years to maintain supplies.

The amount of crude processed last week by US refineries dropped to 11.5m barrels a day, below the 11.7m b/d level after hurricanes Rita and Katrina.

Mexico on Thursday said that it had cut its oil production by 250,000 b/d, as the refineries it supplies in the US Gulf of Mexico were still without power and were not taking deliveries.

In spite of the disruptions, the impact on global oil prices has been muted because of a drop in demand and slower economic growth, which has been exacerbated by Wall Street’s financial crisis, traders and analysts said.

“No one foresaw the offsetting impact of the category-five hurricane that swept through the financial markets, negating the impact of Ike and Gustav,” said Lawrence Eagles, head of commodities research at JPMorgan in New York.

US crude oil futures prices on Thursday traded at $108.03 a barrel, above last week’s 11-months low of $90.51, but well below July’s all-time high of $147.27.

Nevertheless, the production losses are likely to keep the oil market tighter than it otherwise would have been, preventing the economic slowdown and the rapid fall in demand from translating to significantly lower prices, traders said.

Industry estimates show that the cumulative oil output loss three weeks after the storms’ landfall has risen to 30.3m barrels, above the deficit sparked off in the same period by Rita and Katrina in 2005 or hurricane Ivan in 2004.

Nauman Barakat, of Macquarie Futures in New York, said the statistics showed that, in spite of reports that Gustav and Ike had caused no damage, “their impact has been devastating if not more”.

The US Department of Energy said thathigher US gasoline prices were diverting supplies from Europe, helping to fill the gap.

But Amy Myers Jaffe, energy expert at Rice University in Houston, said the drop in petrol inventories supported her argument that the US should require oil companies to hold oil products inventories, rather thancrude oil alone. European countries, which hold strategic inventories of petrol, released their stocks in 2005 to help the US after Rita and Katrina damaged several refineries.

The US Gulf of Mexico accounts for almost 25 per cent of the country’s oil production.

Supply has been constrained for an extended period, with the industry shutting production for hurricane Gustav, which struck on September 1, and keeping it shut until hurricane Ike passed through on September 13.

Production on Thursday stood at about 40 per cent of the 1.3m b/d total. The US government said that a small number of oil production platforms had sunk and others had suffered extensive damage.

The article can be found here.

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