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Gustav Growing, Oil Demand Falling

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Hurricane Gustav has already achieved category one status and is expected to grow into a category four storm when it moves into the gulf. The current storm track has a bull's-eye on New Orleans and that takes it right through the middle of the oil patch.  Prices rallied to $117.89 on the news of its hurricane status.

It has been three years since a major hurricane has hit the oil patch and by all historical norms we are well overdue. Gustav looks like the perfect storm to test the improvements drillers have put in place since their platforms and rigs were strewn about the gulf by Katrina/Rita like straw in a tornado. The $2 billion Thunder Horse platform run by BP with a 75% interest was scheduled to go into service in late 2005 with 250,000 bpd of production. Exxon has the other 25%. Hurricanes Dennis/Emily/Katrina almost sank it in 2005 and caused another $500 million in damage and repair costs. Thunder Horse was finally connected to the first of its wells last month with full production expected next year almost three years behind schedule. This rig is dead center in the path of Gustav.  

The platforms in the gulf are already evacuating people and tying down everything that is not already welded to the deck. 100 to 125 mph sustained winds can wreak havoc with these floating wonders. Every platform has been reinforced and added anchors after the 2005 disaster but none of these preparations have been tested since installation. This will be a trial by fire if Gustav continues on its present course.

The first graphic below shows the map of the gulf oil patch and the path of Katrina (right) and Rita (left). So far Gustav is pointed right between them and right at the most populated portion of the oil patch. Each of the dots is a rig or production platform. The second chart is the current track for Gustav.

Chart of Gulf Oil Installations

Gustav Storm Track

The EIA oil inventory report on Wednesday is expected to show crude inventories rose only 1.0 million barrels in the prior week. Expectations are for gasoline inventories to have dropped by 2.5 million barrels. This should give traders confidence to start going long ahead of the Friday once they are sure Gustav is going to hit the oil patch. As we saw with Fay, hurricanes are fickle and they can and do change course unpredictably and often. Just because Gustav is headed for New Orleans tonight does not mean it will continue moving in that direction.

The EIA said on Tuesday that demand in June was even lower than previously reported. Demand fell -1.17 million barrels per day or -5.6% below the prior June, to 19.533 million barrels per day. This is the lowest level for June since 1998 and the lowest demand for any month since May 2003. Gasoline demand was -4.4% below the prior June and the lowest since June 2001. 

I would like to invite everyone to attend the 2008 Peak Oil Conference with me on Sept 21-23 in Sacramento. There are dozens of speakers and all the presentations will have reams of data on Peak Oil and its impact. On the third page of the registration put my name in the "How did you hear" box so I can send you email about the conference. Go here to register: http://www.aspo-usa.org/aspousa4/

Jim Brown

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