Oil Prices Fall as Market Focus Shifts

9-7-05 - The supply fears that dominated energy-market psychology in the aftermath of Hurricane Katrina receded somewhat on Wednesday as attention turned to expectations of softening demand. Futures prices for crude oil, gasoline and heating oil fell.

"As much as Katrina has taken supply off the table, there's also demand it has taken off the table," said oil analyst John Kilduff of Fimat USA in New York.

Some of the demand that has been lost is due to the devastation and evacuation of New Orleans. The rest is likely to be a consumer response to higher prices, Kilduff said.

Backing that view was a monthly report from the Energy Department that revised downward its forecast for petroleum demand growth in the U.S. by 38 percent. The report predicted a 100,000 barrels per day increase in U.S. petroleum demand in 2005; that is down from 160,000 barrels per day a month earlier "largely due to sharply higher prices," the agency said.

Light sweet crude for October delivery fell $1.21 to $64.75 a barrel in afternoon trade on the New York Mercantile Exchange

Nymex oil futures are roughly $6 below their intraday high of $70.85 reached Aug. 30 in the wake of Katrina, but prices are about 50 percent higher than a year ago.

"Nothing's cheap, it's just that it's coming way down from the panic buying that ensued in the hurricane's aftermath," Kilduff said.

Despite lingering concerns about refinery outages along the Gulf Coast, gasoline futures dipped more than 7 cents to $1.985 per gallon. Heating oil futures fell by 8.93 cents to $1.965 per gallon.

On London's International Petroleum Exchange, October Brent futures were down 30 cents to $64.37 a barrel.

"You have to believe that high prices have certainly hurt some demand," said oil broker Tom Bentz of BNP Paribas Commodity Futures in New York. "But how much is another story. If prices at the pump start falling, everyone will go right back to their old ways of guzzling gas."

Analysts said crude-oil futures also declined for the third straight trading session because of the gradual recovery of petroleum production in the Gulf of Mexico.

More than 860,000 barrels per day, or 57 percent, of Gulf of Mexico oil production remains offline, according to federal statistics released Wednesday. But a week ago, 95 percent of oil output had been shut down.

Also providing some relief to the oil market was a pledge last week from more than 20 nations under the International Energy Agency to release the equivalent of 2 million barrels per day of crude and refined products. More than 680,000 barrels per day of that total will consist of gasoline and diesel, the IEA said Wednesday.

However, the amount of crude oil processed into gasoline, diesel and other fuels by Gulf Coast refineries could be reduced by close to 1 million barrels per day for at least several weeks because of hurricane-related power outages and water damage, according to the preliminary damage assessments.

The four refineries believed to be most negatively affected by Katrina are:

  • Chevron Corp.'s 325,000 barrels per day plant in Pascagoula, Miss.

  • ConocoPhillips' 247,000 barrels per day plant in Belle Chasse, La.

  • ExxonMobil Corp.'s 187,000 barrels per day plant in Chalmette, La.

  • Murphy Oil Corp.'s 120,000 barrels per day plant in Meraux, La.

Another segment of the Gulf's energy infrastructure that may have sustained longer-term damage is the web of underwater pipelines critical to the gathering and transportation of natural gas. Three natural gas processing plants owned by Enterprise Products Partners LP are not yet operational and, depending on the extent of damage, could be out for weeks.

"The longer term impact of Katrina may be felt much more intensely in North American natural gas markets, which like refining have displayed a new dimension of vulnerability," said Energyintel analyst Tom Wallin in a research note from New York.

More than 4 billion cubic feet a day, or 40 percent, of the region's natural gas production remained shut down as of Wednesday, according to the federal Minerals Management Service.

Still, that is a big improvement from a week ago, when almost 88 percent of daily natural gas output was offline and natural gas futures fell by nearly 50 cents Wednesday to $11.16 per 1,000 cubic feet. A year ago, natural gas futures traded below $5.

Since Aug. 26, 71.7 billion cubic feet of output have been lost, while 13.6 million barrels of crude have been lost.

In testimony before Congress on Tuesday, Rebecca Watson, assistant secretary for land and minerals management, said four large deepwater platforms accounting for 10 percent of the Gulf's total oil output suffered extensive damage that could take 3 to 6 months to fix.

On Tuesday, the Energy Department said the average retail price of regular unleaded climbed by 46 cents last week to $3.07 per gallon. That's a nominal record, but still 4 cents below the inflation-adjusted high reached 25 years ago, according to agency statistics.