U.S. Oil and Natural Gas Market Impacts

Prices NYMEX Futures Prices (for October delivery) 9/3/2008 8/29/2008 change Week Ago 8/27/2008 Year Ago 9/4/2007   WTI Crude Oil ($/Bbl) 109.35 115.46 -6.11 118.15 75.08   Gasoline RBOB* (c/gal) 276.68 285.42 -8.74 291.72 199.10   Heating Oil (c/gal) 307.88 319.19 -11.31 328.15 207.95   Natural Gas ($/MMBtu) 7.26 7.94 -0.68 8.61 5.63 *RBOB = Reformulated Blendstock for Oxygenate Blending (RBOB), the base gasoline that needs to be blended with some type of oxygenate, now usually ethanol, to be turned into finished reformulated gasoline (RFG). Ethanol is not blended into the gasoline mixture until just before the gasoline is shipped to the retail stations. Petroleum As of 12:30 pm EDT (11:30 am CDT), September 3, the Minerals Management Service was reporting that about 1.25 million barrels per day (or well over 90 percent) of the federal portion of the Gulf of Mexico’s crude oil production was shut-in.  As of 3:00 pm EDT (2:00 pm CDT), September 3, the Department of Energy reported that 13 refineries in the Gulf of Mexico region remain shutdown, representing 2.5 million barrels per day of capacity, while another 10 refineries had reduced their crude oil throughput.  The 13 refineries that were shut down represent over 1.0 million barrels per day of gasoline output and about 700,000 barrels per day of distillate fuel output, based on recent historical data.  Even without damage, shut-down refineries can take a week or more to return to normal operations.  Additionally, the Department of Energy was reporting that the Capline and LoCap crude oil pipelines, the Centennial product pipeline, and the Louisiana Offshore Oil Port were all temporarily shut down.  The Colonial and Plantation product pipelines, which move supply from the Gulf Coast to the East Coast, were running at reduced rates, although the Colonial pipeline is reportedly seeing improvements in supply injections into the pipeline. However, despite the shut-in of crude oil production and refinery outages, futures prices on the New York Mercantile Exchange (NYMEX) continue to be significantly lower compared to the closing prices on Friday, August 29, before Hurricane Gustav made landfall.  Compared to last Friday, crude oil for October delivery settled $6.11 per barrel lower, while gasoline (RBOB) and heating oil were about 9 cents and 11 cents per gallon lower, respectively, at the close of trading on Wednesday.  Market expectations that shut-in crude oil production and refinery outages are going to be temporary continues to keep prices down, more than compensating for any pre-hurricane price increases.  Over the next few days, companies will be completing their damage assessments to petroleum infrastructure.  As long as companies report no long-term damage, crude oil prices are not likely to spike significantly higher due to Hurricane Gustav. However, temporary local product supply problems could occur before refinery production and pipeline flows return to normal, which could result in increased retail prices in some areas. Natural Gas As of 12:30 pm EDT (11:30 am CDT), September 3, the Minerals Management Service was reporting that nearly 6.8 billion cubic feet per day (or about 90 percent) of the federal portion of the Gulf of Mexico’s natural gas production was shut-in.  As of 1:30 pm EDT (12:30 pm CDT), September 3, the Department of Energy is reporting that there have been no reports of damage to pipeline or production infrastructure.  As of 10:00 am EDT (9:00 am CDT), September 3, the Sabine Pipeline reports that temporary generators are supplying power to Henry Hub and that gas flow will begin later today. Pipeline compression is currently not available at Henry Hub. Henry Hub is a key point for spot and futures natural gas trading in the United States.  There have been no reports of major damage to natural gas processing plant facilities.  Processing plants are expected to resume operations as gas begins to flow. Also see: Hurricane Situation Reports from DOE's Office of Electricity Delivery & Energy Reliability STEO Hurricane Analysis (pdf)