Hurricane Isaac shutters Gulf oil production

Flood Warning

Hurricane Isaac (Source: NASA GOES Project) Hurricane Isaac (Source: NASA GOES Project)

Hurricane Isaac makes a second landfall at Port Fourchon, La. and it is becoming clearer that the threat from this slow moving storm may not come from the winds but the potential flooding. While oil prices have fallen on the expectation that demand for oil will be impacted by this storm, in the aftermath of the storm the demand for higher quality crude could drive WTI higher when the damage becomes clearer. With flood defenses already being breeched in southeast Louisiana, the impact of Isaac on oil production and refineries cannot be underestimated just yet.

Already we know that the majority of Gulf oil production has been brought to a standstill.  The U.S. Bureau of Safety and Environmental Enforcement (BSEE) reports that 93% of daily oil production in the Gulf of Mexico region has been shut due to Hurricane Isaac. And 67% of daily natural gas production in the region has been shut in as well. Oil production has been cut by 1.3 million barrels per day and gas production has fallen 67%, according to reports.

Barbara Powell of Bloomberg News lists the closures. So far six plants shut totaling 1.148 million barrels a day of capacity, that's 6.7% of U.S. capacity and 13% of Gulf Coast capacity. Rates reduced at three other. (Valero Memphis cut rates because Shell shut pipeline because of hurricane, but not in that region.) Phillips 66 Alliance: shut/Valero Meraux, Norco: shut/Placid Port Allen: shut/Exxon Chalmette: shut/Motiva Convent: Shut/ Motiva Norco: reduced rates/Marathon Garyville: reduced rates/Exxon Baton Rouge: reduced rates/Chevron Pascagoula: won't say/Phillips 66 Lake Charles: no for now and doesn't appear likely Alon Krotz Springs: no for now and doesn't appear likely Citgo Lake Charles Mobile: not shut/ Royal Dutch Shell Plc said the refinery in Covent, Louisiana, that it owns jointly with Motiva Enterprises LLC, is being shut down to prepare for Hurricane Isaac, according to an advisory on the company’s website.

If refineries get flooded and cannot be brought back online quickly, we could see crude oil prices soar as the renaming refiners will pay up for good crude. Gas and diesel prices will soar as well as we have seen some wild moves in the wholesale gas cash markets. Obviously the Obama administration, already itching to release oil from the global oil reserves, will release oil at that point but if the refiners are flooded it may not do much good. Of course the Obama administration has said that at this point no decisions have been made on this issue and according to sources, no call to the SPR has been made.

Still pressure is growing by politicians to release oil from global reserves against the advice from the experts and the leaders of the International Energy Agency itself. Bloomberg News reported Maria Van der Hoeven, the executive director of the International Energy Agency, said that there's no need to release strategic oil stockpiles, Bloomberg News reported. Ms. Van der Hoeven said, "we don't have a serious disruption of supply." She said, "the market is sufficiently well supplied."  On Aug. 17, Ms. Van der Hoeven said there was "no reason" for a strategic oil release. U.S. officials haven't contacted the IEA about a potential release of oil, she said. Despite that statement and the warnings from other experts, it has not stopped politicians from asking.

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