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Energy Sector Hums Again

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Energy Sector Hums Again

Ike Could Spark 
Greater Reaction 
Than Gustav Did
September 8, 2008

Energy companies in and around the U.S. Gulf of Mexico continued to ratchet up operations, although there are early signs crude-oil and natural-gas output could once again be disrupted by a hurricane.

More than 20% of oil output and about 30% of natural-gas production in the U.S. Gulf of Mexico had been restored as of Sunday, according to official data. Virtually all output of hydrocarbons in the U.S. Gulf was shut ahead of Hurricane Gustav.

[gas-storage tanks]
Sipa Press
Aftermath of Gustav: Port Fourchon in Louisiana, as L&G Oil & Gas Services Inc. pumps water from one of its gas-storage tanks.

All but four oil refineries were either producing gasoline and diesel or readying equipment for processing. Most pipelines resumed flows after power was restored.

Meanwhile, Hurricane Ike was forecast to move near or over eastern Cuba later Sunday, and was barreling toward it as a Category 4 storm. Whether Ike becomes a menace to energy infrastructure in the Gulf of Mexico — and a force pressuring prices upward — depends on how the storm changes over Cuba and how developing weather systems steer it.

While weather models show Ike entering the Gulf early Wednesday, their forecasts of where Ike is likely to make landfall diverge, ranging from the Florida Panhandle to northern Mexico. “It is much too early to anticipate which areas along the Gulf Coast could be impacted by this system,” the National Hurricane Center said.

Energy markets’ reaction to Gustav was muted, in part because of concerns about reduced demand for oil and gas due to a weaker economy, said Guy Gleichmann, the president of United Strategic Investors Group, a Hollywood, Fla.-based energy brokerage.

But now that crude-oil and natural-gas futures have tumbled, the energy markets could rise sharply in response to a threat from Ike, he said. “We have a stronger chance of a rally than we did with Gustav,” he said. “A lot of the economic negativity has already been priced into the market.”

Light, sweet crude-oil for October delivery fell 8% last week to a five-month low of $106.23 a barrel on the New York Mercantile Exchange. Oil futures had edged up in the days before Hurricane Gustav made landfall on the Louisiana coast Sept. 1, but sold off after it became apparent that the storm didn’t significantly damage energy infrastructure.

Natural-gas futures rallied ahead of Gustav, reaching a high of $8.808 a million British thermal units on Aug. 28. But futures then plunged and settled at $7.449 on Friday.

Royal Dutch Shell PLC, operator of the Gulf’s biggest platform in terms of production, over the weekend said it wouldn’t redeploy all personnel evacuated from offshore facilities “because of the possibility that Hurricane Ike might enter the [Gulf of Mexico] next week and require another evacuation.”

While catastrophic damage like that seen in the wake of hurricanes Katrina and Rita in 2005 was largely avoided after Hurricane Gustav, stresses have begun to appear in the U.S. fuel supply chain, and a direct hit from Ike would strain it further.

The effects of Gustav have rippled into the Midwest and Southeast, as refiners there began cutting rates when pipeline deliveries of Gulf crude were disrupted. The premium on gasoline for immediate delivery in Chicago widened on Friday to 40 cents to 42 cents above Nymex benchmark gasoline futures. The front-month gasoline contract fell 5.9% last week to $2.6861 a gallon, as any longer-term supply worries were offset by concerns about weakening demand in a slowing U.S. economy.

The outlook for oil-product supplies in the short term is improving, although it will take days or weeks for refineries to achieve normal processing rates. Shell’s Capline pipeline, which pumps crude from the Gulf Coast to a Midwest hub, is operating a key segment in Louisiana at limited rates after local utility power was restored.

Marathon Oil Corp. requested oil from U.S. strategic stockpiles last week, according to the Energy Department, for plants in Illinois and Kentucky.

Entergy Corp. said Friday that eight of the 12 refineries it serves in Louisiana are operational, and only one remains without power.

ConocoPhillips‘s 247,000- barrel-a-day refinery in Belle Chasse, La., is still without power.

Exxon Mobil Corp. restarted its plant in Baton Rouge, La., the second-largest oil refinery in the U.S., as well as one in Chalmette, La., which is partly owned by Petróleos de Venezuela SA. A refinery in Norco, La., operated by Motiva Enterprises LLC, a joint venture between Shell and Saudi Arabian Oil Co., was expected to begin producing gasoline on Sunday, while another Motiva facility in Convent, La., could restart this week.

Chevron Corp.’s 330,000-barrel-a-day refinery in Pascagoula, Miss., has begun returning to normal rates after the U.S. Coast Guard reopened a ship channel leading to the plant.

Write to Anna Raff at [email protected]

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