Hurricane Gustav is heading straight for the oil patch and traders are in denial. Crude finished $1 higher for the week and disaster could be looming on the horizon. Gustav was not getting the respect he deserves.
The problem appears to be multifaceted. Private weather forecasters are projecting a turn in the track to hit Texas and miss the majority of the oil patch. Other predictions on Friday had Gustav blowing through the oil patch but at a category 1 or 2 level and leaving little damage in its wake.
The Accuweather.com Hurricane Center had predicted Gustav will enter the gulf as a cat-3 and increase to a cat-4 before hitting the oil patch.
By Saturday afternoon Gustav winds had already exceeded 145 mph pushing it to a category 4 level and NOAA was predicting it would become a category 5 hurricane after it enters the gulf.
The USGS Minerals Management spokesman was on CNBC saying that after Katrina and Rita they beefed up the standards and anchor requirements to reduce the damage from future storms. Several of the oil companies were also interviewed and all expressed extreme confidence that the new safety precautions put in place would keep a repeat of Katrina from happening. Confidence was busting out all over and I could not help but think there were some surprises coming.
I may be nave in my understanding of oil platforms and the forces generated by a category 3 hurricane, much less a category 5, but I saw lots of pictures of wrecked rigs after Katrina, Rita and Dennis in 2005. The picture below is the $1.6 billion Thunder Horse platform owned by BP and Exxon. This was after hurricane Dennis and it was on the verge of sinking. That would be an expensive artificial reef if it had sunk. The second picture is the Mars platform after Katrina.
Mars Platform after Katrina
Hurricanes are unpredictable. Nobody can say five days in advance with any degree of certainty if a hurricane will hit a certain spot or even what category it will be when it hits. To be so cocky that thrie rigs are hurricane proof is just asking for trouble. Remember, the Titanic was unsinkable.
NOAA Hurricane Track
Projected track of Gustav through the oil patch
Combined tracks of both Gustav and Hanna
There are two confirmed storms heading for the gulf this weekend and another stronger storm brewing farther east. This has suddenly become an active hurricane season and just dodging Fay does not make you a pro at surviving the season.
Gustav has a many higher dollar targets to damage than Katrina did. There were only two platforms producing more than 100,000 bpd in 2005 and there are more than six now. Since 2005 the majority of production has shifted to the deeper water with giant platforms now producing the same oil it took dozens to produce in 2005. However, even though the gulf has a lot of new high capacity platforms the overall production has fallen -7% since 2005 to about 1.4 mbpd. In 2005 17 rigs broke free of their moorings and dragged anchors for miles completely disrupting the undersea pipeline system. Production was offline for months in most cases.
Noble said they upgraded the number of mooring anchors on deepwater units from 9 to 12 and on one platform from 12 to 16 to prevent them from breaking loose. This will be the first test of the new mooring systems.
I looked at a lot of possible plays this weekend but based on the lack of rally ahead of Gustav I can't help but think oil is going to drop hard if Gustav does evaporate or turn into a dud. With it turning into a category 4 hurricane on Saturday that does not appear likely.
The Gulf of Mexico produces 20% of our oil and 15% of our gas. I see prices for both either falling hard or exploding next week and taking a position ahead of that event is just rolling the dice. If Gustav wrecks the oil patch any energy plays picked this weekend will gap open out of range. We don't want to be a buyer at Tuesday's open.
We are closing in on the OPEC meeting on September 9th. Based on all the sound bites it appears the general consensus is for production to stay the same but for quotas to be enforced. That will require Saudi Arabia to remove that last bump in production but based on the lack of sustainable rally I don't think it will be missed.
Another factor to add to the price volatility over the next three weeks will be the volatility in the weekly inventory reports. These storms are going to cause havoc with tanker traffic for at least the next two weeks and that will make the inventory levels fluctuate wildly. Add in the shutdown of all the gulf platforms for two days or more and that is another shortfall on inventory replacement. If any refineries are knocked offline that will also add volatility to the numbers. I suspect it will be late September before the weekly reports are back to normal.
You have probable hear by now that John McCain picked Alaska Governor Sarah Palin as his VP choice. I saw a survey on MSNBC late Friday and with 555,836 votes it was a dead heat at 50% on whether it was the right choice or the wrong choice. She is very strong on energy and believes we should drill here before fighting for it overseas. She has taken on the big oil companies in Alaska and so far has won the battles. The democrats are calling her a lightweight but you decide. Do you think it is more difficult to be a governor and run a state like Alaska with hundreds of departments, tens of thousands of employees, budgets, taxes, national guard, police, airports, hospitals, civil service, courts, etc, or sitting in Congress for three years listening to speeches and voting present instead of yes or no? It should be an interesting race. The DNC video on Obama's life should get an Oscar. I thought it was excellent even though I am not going to vote for him. I thought the DNC pulled off a major win with the presentation and his speech was outstanding. If I thought he could accomplish half of what he promised I would vote for him. Unfortunately he is extremely uneducated in the energy field and he is in for a rude awakening if he gets elected.
The price of crude settled at $115.46 on Friday after the government announced late in the day that the Strategic Petroleum Reserve would be available immediately for replacement of any lost production. They also emphasized that the draw rate was 4.4 mbpd and far in excess of the 1.4 mbpd of oil we get from the gulf. The announcement had the desired effect of keeping a lid on prices.
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