Assessing Katrina’s impact on energy markets

(September 2, 2005) To understand where energy prices might be headed in the wake of Hurricane Katrina, it helps to have an accurate picture of where things stand now. Independent energy industry consulting firm Purvin & Gertz released a briefing today on the impact that the natural disaster had on oil and gas production, refining and distribution.

“The loss of refining capacity and crude oil production are intertwined with the complex logistical constraints of transporting crude and finished products to market,” the study says.

The report does not make any forecasts except to say product inventories will probably be tight as refineries play catch up with demand, and try to build reserves needed for winter months. “Worldwide crude pricing patterns will be impacted as they were during the aftermath of Hurricane Ivan in September 2004.”

TD Economics says Hurricane Ivan caused a sharp decline in U.S. petroleum inventories because of a drop in domestic production, imports and refinery operations. In the months following Ivan, energy prices jumped in the lead up to winter, while non-energy commodity prices pulled back. A rally in natural gas prices was sparked by production losses, and the fact that damaged pipelines held back gas reserves.

Citing Katrina’s devastating impact on Gulf Coast wells and refineries, which knocked out roughly 30% of U.S. crude oil production, CIBC World Markets predicts that high energy prices will likely stay with us for the rest of the year.

Purvin & Gertz says oil producers and refineries in the Gulf of Mexico are working to bring production back online, but like recovery efforts following Hurricane Ivan, their efforts and overall recovery in production will be dependent on the conditions of pipelines and, in this case, rebuilding transportation networks.

The Mississippi river is central to the transportation network that supplies nearly one quarter of domestic oil production in the U.S. and about one-fifth of the country’s natural gas production. Damage to the river has made shipping channels unrecognizable and a large number of barges have broken loose and sank in the river.

What’s more, shipping cannot resume in the Mississippi until the U.S. Army Corps of Engineers, currently preoccupied by levee breaches that have flooded the city of New Orleans, remaps the channel. “The timing to reopen the river to ship traffic is a major unknown at this time,” say the report’s authors.

Offshore oil production facilities appear to be intact, but prospects for an immediate return to business are limited and dependent on the conditions of pipelines, many of which were already heavily damaged by Hurricane Ivan last September. Resumption of operations in the Louisiana Offshore Oil Port and its offshore marine terminal will be critical since refineries won’t be able to receive crude oil shipments through the Mississippi river.

On the positive side, the U.S. Department of Homeland Security has relaxed its rules that insisted oil and gasoline be transported between U.S. ports by U.S. ships only. Relieving that requirement will allow foreign vessels to move product between unconnected parts of the country. This development however could potentially raise shipping rates.

As well, the U.S. government has also tapped the Strategic Petroleum Reserve, releasing 30 million barrels of crude oil from reserves, which has, in turn, quieted market speculation. And 26 countries in an international energy consortium say they will release 60 million barrels.

Existing crude inventory levels meanwhile, well above five year averages before the hurricane, should be sufficient to feed production and refinery facilities as they come back online. Overall, the report says a recovery in domestic production is unlikely in the short term, but most of America’s refining capacity appears to already be in startup mode or heading towards it.

Filed by Kate McCaffery, Advisor.ca, kate.mccaffery@advisor.rogers.com