HOUSTON, Sept. 11 -- With the US Gulf Coast looking down the throat of a potential Category 3 hurricane by the weekend and the Organization of Petroleum Exporting Countries promising an end to over-production within 40 days, oil prices still fell to a new 5-month low Sept. 10 as the International Energy Agency reduced its 2008 and 2009 forecasts of oil demand.
In its latest monthly report, IEA said global oil demand will average 86.8 million b/d this year, down from a previous guess of 86.9 million b/d, and 87.6 million b/d, down from 87.8 million b/d (OGJ Online, Sept. 10, 2008).
However, Olivier Jakob at Petromatrix, Zug, Switzerland, charged that the IEA "has been a main component in the making of the oil price bubble" by "grossly overestimating demand growth." He said, "Over the last 3 months, the IEA had to revise down OECD demand in the second quarter by 800,000 b/d but has not made any correction to demand for the fourth quarter." Moreover, he said, "Most forecast agencies have not fully realized that the US turned during 2008 from a net importer to a net exporter of middle distillates, the consequence being that they are double counting demand and will necessarily have to make further downward correction to OECD demand in months to come."
Meanwhile, Hurricane Ike is churning through the Gulf of Mexico toward the greater Houston area where it is expected to make landfall late Sept. 12 or early Sept. 13. It currently is a Category 2 storm but is expected to strengthen to Category 3 or even 4. For days, oil companies have been shutting in oil and gas production in the gulf and preparing coastal refineries to shut down. They also have delayed returning workers to offshore facilities that were evacuated ahead of Gustav earlier this month.
As of mid-day Sept. 10, the US Minerals Management Service reported 452 of the 717 manned platforms and 81 of the 121 mobile rigs in the gulf were evacuated. Officials also reported 95.9% of the oil and 73.1 % of the natural gas normally produced from offshore federal leases were shut in. "Combined, Gustav and Ike have reduced gulf production by 14.1 million bbl of oil, 67.9 bcf of natural gas," said analysts at Pritchard Capital Partners LLC, New Orleans.
ConocoPhillips began shutting its 247,000 b/d refinery at Sweeny, Tex., while BP PLC was deactivating its 475,000 b/d Texas City refinery. The Louisiana Offshore Oil Port, the nation's only deepwater port, stopped offloading tankers because of rough seas, and the Coast Guard halted inbound traffic on the Houston Ship Channel. A Strategic Petroleum Reserve site near Freeport was shutting down operations and evacuating personnel.
Jakob said Sept. 11, "The euro has been trading overnight below $1.40, and if it was not for the storm premium still included in the price of oil, we would be trading West Texas Intermediate well south of $100/bbl." If Ike fails a major disruption of oil and gas operations, he said, "Given the value of the dollar index, the risk is real for a severe [price] correction next week." With the strengthening US dollar, Jakob said, "World demand is not benefiting that much from the lower oil prices."
Pritchard Capital analysts said, "The futures market is starting to figure out the disconnect that has been happening in the cash market this week. Crude oil is showing losses, while reformulated stock for oxygenate blending and heating oil futures are solidly higher this morning. Traders continue to watch Hurricane Ike and while not all production rigs in the Gulf of Mexico will dodge Ike, it seems as if a majority will. That along with a stronger dollar and weak demand weigh on crude oil this morning as October WTI is trading down."
However, they said, "Refined products are showing strength this morning as crude oil falters. Refinery disruptions will keep supplies of gasoline and diesel tight and at the same time take a toll on crude oil demand. Gains of nearly a nickel are being seen in the gasoline market." Meanwhile, the cash gasoline market on the Gulf Coast is strengthening, with other cash markets—"most notably, Chicago"—improving as well.
OPEC ministers agreed Sept. 10 to "strictly comply" with their September 2007 production quota of 28.8 million b/d, which implies a de facto reduction of some 530,000 b/d of overproduction (OGJ Online, Sept. 10, 2008). "That 'strictly' does seem to bear the hallmarks of compromise," said Paul Horsnell, Barclays Capital Inc., London.
Jakob said, "OPEC might cut production by 500,000 b/d, but estimates of oil demand will be revised down by about the same amount; hence in the end the fundamental picture has not really changed and OPEC would need to cut at least 1 million b/d more to prevent further stock builds. At the current value of the dollar index there will be not be many volunteers to take the first step and in the end it is still the price that dictates. Real action from OPEC will only come at lower prices on a dollar index adjusted basis." The average price for OPEC's basket of 13 reference crudes lost $1.69 to $96.80 bbl on Sept. 10.
Horsnell said, "There is perhaps less to the result of the OPEC meeting than seems to have met press and analyst eyes. While we believe that Saudi Arabia would be perfectly happy with prices in the $90 to $100 range, it seems that other OPEC members wished to give a stronger signal. For those members, it appears that the $100 level is shaping up as a sort of 'soft floor' or 'alarm bell' which, while triggering price-defensive actions, might not be perceived as the level where all available policy tools should be drawn upon. In that sense, OPEC's entering a price defense mode is the key signal, but we would not regard that as a surprise."
He said, "The key current dynamic of OPEC is that Saudi Arabia is producing well above its allocation, and a policy decision about the output of a single member is a sovereign issue rather than something that fits very easily within a broader OPEC framework." Horsnell said, "On one hand, Saudi Arabia would seem to have more ability to defend prices now than ever before. The Kingdom is producing at a high level, and at the least the first 500,000 b/d that could come off the market would be purely at Saudi discretion. In other words, there would be expected to be considerable credibility in the ability to defend prices.
"On the other hand, the current oil market has very pessimistic sentiment, is almost totally focused on the demand side and is strongly affected by momentum investors. It might (indeed surely will), ultimately prove to be as much of a [fatal] 'Charge of the Light Brigade' experience as taking on Saudi Arabia to the upside proved, but we feel that the market might well try to push below Saudi Arabia's comfort levels," Horsnell said. "With non-OPEC supply still disappointing dramatically relative to consensus, there has been a lot of insulation from the worsening OECD demand figures. Global oil demand growth is still positive for the year despite the OECD weakness, but in our view only just at a current estimate of 550,000 b/d. Despite the still benign balances, market sentiment is still in our view deteriorating noticeably."
The October contract for benchmark US sweet, light crudes traded as low as $101.36/bbl Sept. 10 before closing at $102.58/bbl, down 68¢ for the day on the New York Mercantile Exchange. The November contract dropped 74¢ to $102.62/bbl. On the US spot market, WTI at Cushing, Okla., was down 68¢ to $102.58/bbl. Heating oil for October lost 2.23¢ to $2.90/gal on NYMEX. The October RBOB contract inched up, however, by 0.9¢ to $2.66/gal.
Natural gas for the same month dropped 14.2¢ to $7.39/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., jumped by 40.5¢ to $7.67/MMbtu. The Energy Information Administration reported Sept. 11 the injection of 58 bcf into US underground storage during the week ended Sept. 5. That brought the amount of working gas in storage to a little over 2.9 tcf, which is 146 bcf less than last year at this time and 82 bcf above the 5-year average.
Pritchard Capital Partners said, "With shut-ins related to hurricanes Gustav and Ike throwing off injection rates, it would appear to be an uphill battle to reach any sort of end-of-injection season storage level record." Injections would have to average 72 bcf over the remaining 9 weeks to reach a new storage record.
In London, the October IPE contract for North Sea Brent crude fell $1.37 to $98.97/bbl. Gas oil for September dropped $16.75 to $921/tonne.
Contact Sam Fletcher at email@example.com.