Oil focuses on inventories while waiting for Isaac to pass

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

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Hurricane Isaac has now made landfall in the southern Gulf with the eye of the storm very near New Orleans. The storm has not intensified beyond a Cat 1 storm... which is good news but the size of this storm as well as the slow movement of the storm is likely to dump a significant amount of rain and likely cause flooding in low lying areas. There already have been widespread power outages for thousands of customers. With a lot of the storm still offshore, this will be the story in the region all day today and it will be a day or so before an assessment can be made as to the condition of the oil and Nat Gas infrastructure.

As of yesterday the BSEE reported 1.287 million bpd or 93.28% of GOM crude oil production shut in and 3,000 mmcf/d or 66.7% of GOM Nat Gas production also shut in. Over a million bpd of refinery capacity has been shut along with LOOP shut down since Monday. As I have been discussing all week the market has only priced in preemptive cuts and has assumed there will be no infrastructure damage and thus no longer lasting supply interruptions of either Nat Gas or oil. As the storm passes through the area over the next several days the industry will be able to quickly assess the condition of the oil and Nat Gas facilities. As of now there are no reports of any unexpected events that would indicate any major oil and Nat Gas issues.

The other factor keeping a lid on oil prices is the threat of a release of oil from the SPR as well as G7 leaders yesterday calling on oil producers with spare capacity to increase production. In addition they indicated that they would call on the IEA if needed. So as of the moment oil prices are likely to remain subdued for the next several days at least. In addition to the above last night's API inventory report (see below for a more detailed discussion) was mostly bearish with a larger than expected build in both crude oil and distillate fuel with the draw in gasoline coming in above the expectations.

The evolving global economic situation is not too far into the background as another pass at 2nd quarter US GDP data is due out today with the market consensus looking for a revised 1.7%. In addition on Friday morning US Fed Chairman Bernanke will be speaking at the Jackson Hole Symposium with many in the market expecting some sign that the Fed is heading toward a new round of quantitative easing. I still believe that those in the market with that view will be disappointed as Bernanke is more likely to continue to reiterate the party line of the Fed that they will take additional action if needed.

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