Energy Worries Fueled By Hurricane Rita
Wednesday, September 21, 2005SUSIE GHARIB: Another volatile day for energy prices on concerns that hurricane Rita could damage or destroy key oil facilities in the Gulf of Mexico and Texas. In New York trading, crude oil prices, gasoline prices, and natural gas futures all moved higher, as Rita grew into a monster category five hurricane. Erika Miller has more on Rita`s potential impact on the energy markets.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: It was even more frenetic than usual in the oil pit of the New York Mercantile Exchange as traders bet on possible destruction from hurricane Rita. Traders were riveted to weather reports tracking the path of the storm, which was upgraded to a category five late today.
ERIC BOLLING, INDEPENDENT OIL TRADER: The real interesting part is which direction it`s going to take. If it takes the path that`s projected right now, you will probably see some substantial damage to the infrastructure along the Gulf coast.
MILLER: Crude oil futures for November delivery closed up $0.60 at $66.80 a barrel. That was well off the highs for the day. Gasoline futures for October lept $0.08 to $2.05 a gallon. Prices pulled back after fresh inventory data showed an unexpected rise in some petroleum supplies. Gasoline stockpiles rose by 3.4 million barrels. Distillates, which include heating oil, gained by 800,000 barrels. Crude inventories bucked the trend, falling 300,000 barrels. Most traders agree, the direction of crude prices depends entirely on the path of Rita. Of particular concern is damage to Texas oil refineries which escaped the wrath of hurricane Katrina three weeks ago.
JACK AYDIN, OIL ANALYST, KEYBANC CAPITAL MARKETS: I think you`ve got 26 percent of U.S. refining capacity in that area. So, any refinery that goes down is going to have an impact on gasoline supplies, distillate supplies that are available in the country.
MILLER: Oil companies like ExxonMobil have already evacuated workers and cut production. And some refiners are already reducing their output. Under the worst case scenario, Aydin predicts crude prices could hit $70 a barrel in coming sessions. That, he says could send gasoline prices at the pump back to record highs. If on the other hand, there is minimal damage to oil facilities in the area, Aydin expects crude prices to retreat sharply. There are concerns that hurricane Rita could become even more dangerous as she makes her way across the Gulf of Mexico. Right now, the hurricane is projected to make landfall late Friday or early Saturday. Erika Miller, NIGHTLY BUSINESS REPORT, New York.
SUSIE GHARIB: Joining us now for more analysis of the energy risks of hurricane Rita, Bill O`Grady, assistant director of market analysis at AG Edwards. Hi, Bill.
BILL O`GRADY, ASSISTANT DIRECTOR OF MARKET ANALYSIS, A. G. EDWARDS: Hi, Susie.
GHARIB: All right, let`s talk worst case scenario, that Rita shuts down the bulk of refineries for a month. What does that mean to the U.S.?
O`GRADY: Well, it would take out just shy of 20 percent as I estimate of U.S. refining around this area, plus the additional 4 percent to 5 percent that`s already out because of hurricane Katarina. We would lose about 25 percent of our refining capacity. This would mean a significant increase in product prices, gasoline is where we would see it first but it would also affect diesel and heating oil. Interestingly enough, it might not actually be all that bullish for crude oil because you would lose -- losing this productive capacity also depresses the demand for crude and so we may see margin expansion for refiners but it may come from mostly increases in product prices and less so with crude oil.
GHARIB: So how real is $5 a gallon gasoline?
O`GRADY: Well, you know, it`s a really interesting question. I`ve seen this bandied about in the media today. And I think to get to $5 you have to assume that there is no sensitivity or little sensitivity on consumers to higher gasoline prices. And I`m just not quite sure that is the case. We`re in a seasonally weak period of the year for gasoline consumption. And I suspect that at above $3, we already saw some reaction by consumers. If prices move significantly above $3, I suspect you would see a significant reaction by consumers to conserve.
GHARIB: So let`s say that Americans do become very conservation conscious because of high prices, what does that do to the whole supply/demand picture? What does it do to the demand side?
O`GRADY: If you look at what happened in the United States from 1980 to 1985, you saw significant decline in energy consumption and a lot of that was done because prices got high, and consumers changed their behaviors. You remember, we ditched our larger cars. We bought smaller ones. We went to 55 miles an hour on the highway. These are all things that we can do again and in fact we could do even better. For oil producers, this is frankly the nightmare scenario because once that demand -- once these changes occur that demand growth is generally lost for a number of years. And I think this is one of the reasons why OPEC has attempted to jawbone the market lower.
GHARIB: Let me get back to Rita and the potential risks here. You were telling me earlier that Rita is what you call a refinery storm in that it is going to really impact the refinery, so it is understandable why there is a potential for gasoline prices and natural gas prices to be going up. But why are we also seeing crude prices rising?
O`GRADY: Well, one of the interesting things that comes up with this is that as product prices go up, it increases refining margins. And it tells refiners, not just the United States, but more importantly worldwide, that there is money to be made by buying crude oil, refining it and shipping it to the United States. And so as worldwide refining margins increase, the demand for crude oil rises. Now what is interesting is that if we do get the worst case as I put it and we do see another significant choke of U.S. refining capacity taken off line, there may be enough taken off line to where the demand effect for crude oil ceases to exist. Frankly, we have never seen it happen before so we really don`t have a history to go on.
GHARIB: Let me see if I can squeeze in one more question before we run out of time. We saw that the dollar was down today and gold was up sharply. So what is the message of these markets?
O`GRADY: One other market I would like to throw in there too, we also saw falling long-term interest rates. I think it is a signal from the markets that the Federal Reserve probably went a step too far. And that we run the risk of depressing growth, especially if we start to see another lift in energy prices because of hurricane Rita. So the Fed may have made a mistake and that was the message of the markets today.
GHARIB: All right, Bill, thank you very much. Nice talking to you. We`ve been speaking to Bill O`Grady, assistant director of market analysis at AG Edwards.
