Storm effect on oil prices waning as shale booms

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The power of hurricanes to drive up oil prices is diminishing as the proportion of U.S. crude coming from the Gulf of Mexico falls to a 14-year low because of the increase in onshore shale production.

Oil prices were little changed in the week ended Aug. 31 even as more than 90 percent of Gulf capacity was shut for five consecutive days with Hurricane Isaac hitting the region. Oil jumped 44 percent in 2008 during Hurricane Ike and 14 percent in 2005 when Katrina devastated the Gulf Coast. Crude inventories rose a week after Isaac made landfall in Louisiana while Katrina cut stockpiles for six straight weeks.

U.S. oil production reached a 13-year high in July as growth in output from shale-rock formations, including the Bakken in North Dakota, bolstered supplies and sent inventories to the most since 1990. Production in the federal waters of the Gulf will account for 21 percent of domestic output this year, the lowest level since 1998 and down from 29 percent in 2009, according to Energy Department data.

“The U.S. supply story is shale production,” Harry Tchilinguirian, BNP Paribas SA’s London-based head of commodity markets strategy, said in a phone interview yesterday. “It’s not so much about the Gulf and the impact of hurricanes is just a temporary shutdown of production that should recover quite rapidly.”

Crude for October delivery gained 38 cents, or 0.4 percent, to $98.69 a barrel at 12:07 p.m. on the New York Mercantile Exchange after climbing to $100.42. Prices rose 0.3 percent in the week ended Aug. 31.

Hurricane Isaac

Isaac, a Category 1 hurricane, made landfall on Aug. 28, shutting in as much as 1.31 million barrels a day of production on Aug. 30, or 95 percent of the region’s capacity, according to the Bureau of Safety and Environmental Enforcement.

Closures remained above 90 percent, or more than 1.2 million barrels a day, in the five days ended Sept. 1. About 36 percent of Gulf output was still shut on Sept. 7.

“Storms aren’t going to cause as much damage as they used to,” Kyle Cooper, director of commodities research at IAF Advisors in Houston, said in a phone interview. “The Gulf is still an important part of the U.S. oil market but its significance has been declining over the past few years.”

There were no storms threatening production in the Gulf of Mexico this week. Tropical Storm Nadine, the 14th named system of the Atlantic season, was 765 miles (1,235 kilometers) east- southeast of Bermuda and posed no threat to land, the National Hurricane Center said today in its latest advisory.

Isaac cut a total of 10.5 million barrels of oil supply from the Gulf, according to LCI Energy Insight, an energy analysis firm in El Paso, Texas.

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