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Fay Flounders, Russia Still Fighting

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Tropical Storm Fay crossed Cuba picked up speed but ran into the Florida coast rather than up the eastern gulf. Fay has run out of steam with winds of only 45 mph and no chance of impacting any oil facilities in the Gulf. Crude prices rallied to $115.30 overnight on fears Fay would move westward but once it was clear there was no danger the price fell sharply to about $112 Monday night.

Meanwhile Russia tightened its grip on South Ossetia instead of pulling out as agreed. Russia moved short range ballistic missiles into Ossetia in a move that appeared intended to tighten its grip for another push rather than reduce troops. The SS-21 missiles can now reach much of Georgia including Tbilisi and the new capability is not one of peace. The move appears to solidify claims from the Russian foreign minister that South Ossetia and Abkhazia are to be separated from Georgia. Western officials also noted that a battalion from Russia's 76th Guards Airborne had been deployed to a city in North Ossetia and several additional battalions from the 98th Guards Airborne were preparing for a move into the region. Russia Bear-H bombers carried out "training missions" over the Black Sea in what the Pentagon said appeared to simulate cruise-missile attacks against Georgia.

All of this would not be such a worry for the rest of the world except that Georgia is a crucial choke point for deliveries of oil from the Caspian Sea. On Saturday Russian troops blew up an important bridge cutting the east-west rail route that carries oil from Azerbaijan to Georgia's Black Sea port of Batumi. Supplies of up to 70,000 bpd of oil has now been eliminated from that route. It is also the main route for bringing construction materials from the west to Tbilisi. Russia has already said it will not allow the one million barrel per day BTC pipeline to reopen. Eight Russian ships of the Black Sea fleet took up positions just off Poti Harbor effectively blocking the port and preventing tankers from loading. Eight coast guard ships were blown up in the port and the coast guard head quarters was demolished.

Further problems in Nigeria prompted China's CNOOC Ltd (Nyse:CEO) to abandon two offshore leases where they had a 35% interest and had discovered oil last year. The rising number of kidnappings of Chinese workers prompted CNOOC to abandon the leases. The 35% interest was turned over to the lease operator Emerald Energy Resources. CNOOC will keep a nominal 5% stake as collateral for their $80 million investment in the project. Reportedly the two CNOOC wells both hit significant finds in 2007. Shell is still claiming no progress on repairing the pipeline in Nigeria and the force majeure could be extended past September.

Goldman Sachs cut its U.S. natural gas price forecast for the Northern Hemisphere winter by 23% because of higher than expected output and lower demand from power plants. Expectations are for gas to trade at $10.30 per mbtu and down from prior estimates of $13.40. The average price for Sep/Oct is now expected to be $9.25, down from $13. The Energy Dept said gas supplies are expected to increase by 8% according to the Energy Outlook released on Aug-12th. Goldman expects U.S. gas output to rise by 720 mcf per day because of higher output from shales. So far in 2008 U.S. output has increased by 8% to an average of 55.9 bcf per day. Goldman also said natural gas was oversold and was currently being priced below the estimated marginal cost of production.  That sharp decline in price gives LNG operators no reason to send gas to the U.S. when they can get more for it in Asia and Europe. Goldman said imports were likely to drop by 390 mcf per day for this reason.

Jim Brown

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