Planned oil reserve release sends oil prices below $70 a barrel
The announcement reflected how seriously the U.S. administration viewed the situation — the reserve is meant to cushion the nation against national emergencies.
U.S. Energy Secretary Samuel W. Bodman said the government will release an unspecified amount of oil from its strategic petroleum reserves — a move designed to give refineries in the Gulf Coast area a temporary supply of crude oil to take the place of interrupted shipments from tankers or offshore oil platforms affected by the storm.
Light, sweet crude for October delivery on the New York Mercantile Exchange rose as high as $70.65 a barrel in electronic trading before slipping back after Bodman’s comments to $69.23, down 58 cents from Tuesday’s settlement price.
Futures prices had risen to an intraday record of $70.85 on Tuesday before settling at $69.81, a record close since trading began on the Nymex in 1983.
Still the move would not remedy destruction to refineries churning out much of the unleaded regular and premium grade used in the United States. That damage was sure to sharply limit already tight supplies, driving prices up not only on trading floor but also at the pumps.
In a reflection of what will soon hit car owners in their wallets, gasoline prices, which closed up 20 percent Tuesday on the New York Mercantile Exchange, continued climbing Wednesday. Unleaded gasoline rose more than 6.5 cents to $2.5400 a gallon by afternoon in Europe.
Heating oil fell nearly a cent to $2.0660 a gallon, reflecting expectations of that U.S. figures due out later Wednesday will show an increase in stocks — and hopes that production shortfalls left by Katrina will be remedied ahead of the Northern Hemisphere winter.
The U.S. Minerals Management Service said Tuesday that 95 percent of the Gulf of Mexico’s oil output was out of service, with more than 4.6 million barrels of production lost since Friday.
October Brent crude rose 37 cents to $67.94 a barrel on London’s International Petroleum Exchange.
Oil prices are now more than 60 percent higher than a year ago, although still below the inflation-adjusted high of about $90 a barrel that was set in 1980.
Still, with gasoline supplies already tight before the storm hit, analysts suggested that additional troubles caused by refinery shutdowns would be of most concern to U.S. drivers already besest by high prices.
“Crude is a sideshow here,” said Paul Hornsnell, head of energy research at Barclays Capital in London. “We were expecting gas to spike even before the storm hit because the situation was already very very tight — refineries were having trouble increasing production and inventories were (already) at a 20-month low — and that was last week.”
Eight refineries were shut down due to Katrina — half of them producing gasoline. Vienna’s PVM Oil Associates additionally reported at least three others flooded and power failures sidelining others for an unknown length of time .
Hornsnell said the damage translated into an estimated 30-million-barrel loss in gasoline output — a problem that cannot be solved by increasing crude production or siphoning oil from the U.S. petroleum reserve.
“What’s OPEC supposed to do here?” he asked, of recent pledges by key members of the Organization of Petroleum Exporting Countries to up the amount of oil being pumped.
The U.S. oil reserve is the nation’s emergency supply of 700 million barrels of crude oil buried in salt caverns in Texas and Louisiana. The decision to authorize the release of oil from the reserve is expected to come with the stipulation that oil companies replace the oil later with a larger quantity.
Even without the damage by Katrina factored in, the U.S. Department of Energy’s midweek petroleum data snapshot later Wednesday was expected to show another drop in gasoline inventories, primarily from the summer driving season.
Crude and distillate stocks were likely to rise. Katrina’s influence on U.S. stocks will only be realized in next week’s report but some analysts already claim to know the score — even if the Bush administration taps the nation’s crude oil stockpile to help refiners.
“In the next few months, there’s no upside,” said economist Mark Zandi of Economy.com, an economic consulting service. “And this winter, we’re going to feel it more noticeably as people pay record gas prices and record home-heating bills.”
Other commodities also were affected by Katrina’s fury.
Natural gas futures spiked 34 cents to $11.999 per 1,000 cubic feet after earlier touching a record intraday price of $12.30.
The U.S. minerals management agency said 88 percent of natural gas output was shut down, resulting in a loss of 25.4 billion cubic feet of lost production since Friday.
Royal Dutch Shell PLC’s mammoth Mars platform appeared to be potentially the largest Katrina casualty, with aerial photos showing significant damage to the top of the facility that normally churns out 220,000 barrels of crude and 220 million cubic feet of natural gas a day.
Energyintel analyst Tom Wallin said natural gas supplies were probably hurt more by Katrina’s wrath than crude output.
“Crude oil production could be replaced by a release of barrels from the U.S. strategic reserve, there is no such safety valve for natural gas,” he said. “For gas, the fear is that commercial stocks could be severely dented, leaving inadequate inventories for the winter.”