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Multiple Events Pushing Oil Prices Higher

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Hurricane Ike is now barreling towards the gulf as a much stronger storm than Gustav. The constantly updating forecast track of this category 4 storm is now pointed at western Louisiana and east Texas. That target has changed numerous times since the first track had Ike moving up the eastern seaboard rather than entering the gulf. The storm is due to enter the gulf early Wednesday and that is when the forecast track will become more accurate.

The sudden change in the track since Friday had traders buying crude futures at the open on Sunday night. The majority of oil and gas production in the gulf is still offline from the Gustav closure and now it appears much of it will not be turned back on until after Ike passes.

This means the gulf production will have been offline for the better part of three weeks before it can be restarted. If Ike continues to intensify then there is the potential for damage and the prospect for an even longer shut in of production.

The tanker traffic headed for the Louisiana Offshore Oil Port or LOOP, the major offloading point for those very large crude carriers (VLCC), is again very close to the center of the current track. Not only will LOOP not be able to offload oil after Tuesday but any tankers headed for the gulf have now been in a holding pattern for two weeks as the various storms churned through the Caribbean. That holding pattern will increase another week and imports will be seriously impacted.

The weekly crude oil inventory reports are going to take a serious dive with three weeks of gulf production and gulf imports halted. We could easily see a drop of 10 million barrels this week and potentially rising to 20 million barrels by the following week. Eventually those tankers will line up nose to stern in the gulf and the imports will recover but the production lost in the gulf can never be made up. The U.S. will have to depend in future imports to fill the gap.

With OPEC meeting on Tuesday to discuss Q4 production quotas that could be a problem. The oil cartel is widely expected to claim no change in their official press release but informally require all countries to halt production above their quotas. In August OPEC produced 574,000 bpd above their official quota. Saudi Arabia is believed to be producing 700,000 bpd over their quota to make up for shortfalls by other OPEC nations.

With oil process flirting with $100 OPEC is going to be very concerned with keeping prices above that level. Not concerned enough to invoke the world's wrath by an official production cut but concerned enough to talk tough inside the cartel. Almost every OPEC nation has had somebody mention the $100 price as fair over the last couple weeks. That is a key signal that they plan to do whatever is necessary to support it.

The wild card here is Saudi Arabia. They are the lone country to not make any comments about production levels or prices. As the de facto leader of OPEC with more than twice the production capacity of any other country there are fears that Saudi will not be bullied into cutting back on their over quota production. You may remember Saudi held the conference on oil prices and made a big show of increasing production to help bring prices down. They also responded to requests from President Bush for increased production. However, at the time of the increase Saudi did say it was only temporary and that gives them a graceful exit window.

Next week is going to be interesting in the oil patch and on the trading floor.

Jim Brown

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