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Countdown In Progress

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The hours are ticking off the clock as we count down to tropical storm Gustav slamming ashore in Louisiana. The current forecast is for 8:PM Monday night for landfall but the damage will be done well before then. Gustav will hit the oil patch about 8:AM Monday morning. Currently it is estimated to be only a category 3 hurricane but a Cat-3 can produce winds up to 130 mph with storm surges of 9-12 feet.

The description of the categories of hurricanes include:

Category 1: Winds 74-95 mph, storm surge 4-5 ft.

Category 2: Winds 96-110 mph, storm surge 6-8 ft.

Category 3: Winds 111-130 mph, storm surge 9-12 ft.

Category 4: Winds 131-155 mph, storm surge 13-18 ft.

Category 5: Winds greater than 155 mph, surge over 18 ft.

Only three category 5 hurricanes have made landfall as a cat-5 in the U.S. since record keeping began. The Labor Day hurricane in 1935, Hurricane Camille 1969 and Hurricane Andrew in August 1992. Camille hit the Mississippi Gulf Coast causing a 25 ft storm surge, which inundated Pass Christian. Hurricane Katrina was a cat-5 over the gulf but weakened to only a cat-3 when it hit the coast. Katrina caused the most damage of any hurricane at $81 billion. Hurricane Wilma in 2005 was also a cat-5 over the gulf, actually the strongest hurricane on record, but she weakened before moving ashore.

To say Gustav is "only" going to be a cat-3 when it strikes Louisiana understates its potential damage since Katrina was only a cat-3 when she made landfall. Hurricanes tend to pickup intensity once they move out of hurricane alley and over the gulf. The warm water and lack of windbreaks on the ground add to their strength. Currently Gustav is taking dead aim at the oil patch and New Orleans and there is likely to be a mass exodus out of New Orleans once businesses close on Friday. Gustav has already killed 23 people in the Caribbean.

Gulf oil installations are already shutting down so they have time to evacuate before the winds pick up. Analysts estimate 80% of gulf production will be shut in as a precaution before Gustav hits. The U.S. gets 25% of its oil and 15% of its natural gas from the gulf oil patch. When Katrina and Rita hit in 2005 that supply was knocked offline for months in some cases and some supply was never brought back online because the platforms were completely destroyed and deemed to expensive to rebuild compared to their remaining life expectancy. Those twin storms completely destroyed 109 oil platforms and five drilling rigs. Hundreds of others were damaged. There are more than 4,000 oil and gas installations in the gulf.

Crude oil prices rose Wednesday night to $119.25 before easing slightly as traders waited for the next storm update at 5:AM.

Crude inventories in the EIA report Wednesday morning were flat with only a minor -200,000 barrel draw. The storm surge caused by Eduardo has passed. You can bet there will be another in the report two weeks from now as tankers now in a parking orbit outside the gulf wait for Gustav to pass.

Gasoline inventories fell by -1.2 million barrels and that was less than the expected drop of 2.5 million. Distillates were unchanged. Refinery utilization rose sharply to 87.3% from 85.7% but the very low gasoline crack spread is keeping refiners from beefing up production. Once past Labor Day refiners will begin replacing the summer blend of highly oxygenated fuels to the winter blend and crack spreads will increase as well as the level of production. Gasoline demand has leveled off at 9.4 mbpd for the last four weeks indicating that consumers are relaxing their driving restrictions now that prices have cooled.       

Jim Brown

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