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.
Yet an early release from the reserve may have the opposite effect that political leaders may hope for. By trying to artificially reduce prices by a release, they may encourage more demand leading to a much larger price spike later if and when there is a more serious disruption of supply.
Crude oil market also has to focus on the economy as well and worry that a drop in US confidence could hurt demand. On the other hand, it could increase the odds for easing as traders wait for Federal Reserve Board Chairman’s Ben Bernanke’s speech at Jackson Hole not to mention today's GDP. Signs of easing could send prices higher. The European Central Bank President Mario Draghi has vowed to do “whatever it takes” to save the euro and is trying to raise stimulus hopes by saying that Europe needs to employ "exceptional measures" at times to ensure its policy can be effective. Yet beware when he said he will act within its mandate. So I guess that means whatever it takes within the mandate.
Yet a surprise crude build from the API may temper some rallies. The API reported that crude oil inventories rose by 5.46 million barrels and that was somewhat comforting considering that they could fall by 7 million barrels next week. The API also reported that gasoline supply fell by 2.40 million barrels — less comforting I suppose — and distillates up by 1.36 million barrels, a little bit better. I think next week’s draw might have been worse if it were not for more Canadian and US on land production.
Speaking of Canada and politics the Wall Street Journal is reporting that Ottawa increasingly is signaling that it will push China to open its markets more to Canadian companies as a condition for approving Cnooc Ltd.'s proposed US$15.1 billion offer for energy producer Nexen Inc. All significant foreign investments in Canada are subject to Ottawa's review on whether they will have a "net benefit" to the country's economy. That subjects Beijing-controlled Cnooc's July agreement to buy oil-sands operator Nexen to a review process that could stretch late into the year. Canada has reached out to Asia, and China in particular, for investment and as an alternative to the U.S., as a market for Canada's abundant oil and mineral riches. Ottawa has blessed a series of recent, smaller Chinese deals. But federal and provincial officials long have chafed at barriers to significant Canadian investment into China. Canada's Industry Minister on Tuesday suggested that better access to the Chinese market could be a focus in the government review.
Industry Minister Christian Paradis, whose portfolio includes reviewing foreign deals, declined to discuss the Cnooc-Nexen deal in detail, saying Cnooc hadn't filed an official application for review. He also steered clear of saying reciprocity was a condition for the deal to go forward. But he echoed comments last week by Canada's Prime Minister, who indicated that such concerns would be part of the process. "What we hope is for Canadian companies to grow, not just here but everywhere in the world where they have opportunities," Mr. Paradis told reporters. "And, as the government, we have to make sure they have the opportunities." The issue has been a focus generally for Ottawa, he said. Canada and China agreed this year to pursue exploratory discussions to strengthen economic and trade relations. "We are negotiating a lot of free-trade agreements, and we have some investment agreements with other countries. We will be pushing this very, very hard," Mr. Paradis said.
Canadian Prime Minister Stephen Harper had been tight-lipped about the review process but indicated last week for the first time that reciprocity could be a topic for discussion. Asked why Canada should approve the Cnooc-Nexen deal amid restrictions that prohibit similar investments in China by Canadian companies, he answered, "you do raise some important questions." The agreement will be measured, "across a range of considerations, including some of the ones you've mentioned," he said. With small capital markets of its own, Canada typically has welcomed foreign investment, particularly in the capital-intensive oil and mining industries. The Canadian government has rejected just two foreign takeover offers, including Anglo-Australian miner BHP Billiton's US$38.6 billion bid in 2010 for fertilizer maker Potash Corp. of Saskatchewan Inc. Two years earlier, the
Harper government blocked U.S.-based Alliant Techsystems Inc.'s US$1.3 billion planned purchase of the space-technology division of Vancouver-based MacDonald,Dettwiler and Associates Ltd.
Reciprocity could be a hurdle for the Cnooc-Nexen deal in the U.S. as well. The deal is subject to Washington's approval because Nexen has oil wells in the U.S. Gulf of Mexico. U.S. Sen. Charles Schumer, a New York Democrat who serves on the Senate's Finance Committee, has asked Treasury Secretary Timothy Geithner not to approve the deal until Beijing makes "tangible, enforceable commitments to ensure U.S. companies reciprocal treatment." A Must Read In The Journal!
