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Oil sinks on reserve release talk, storm forecast
Source: Agencies |
August 28, 2012, Tuesday
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THE price of oil fell yesterday as the threat to production from Tropical Storm Isaac appeared to lessen and traders speculated about a release of oil from US reserves.
Forecasts for Isaac have moderated, easing concerns that the storm could damage key oil and gas operations in the Gulf of Mexico. The National Hurricane Center now predicts it will grow to a Category 1 hurricane instead of a stronger Category 2.
Benchmark oil fell 68 cents to end the day at US$95.47 a barrel on the New York Mercantile Exchange. In London, Brent crude dropped US$1.33 to US$112.26 a barrel on the ICE Futures exchange.
About one-quarter of the US oil is produced in the Gulf of Mexico. As of yesterday afternoon, about 80 percent of Gulf oil production was suspended, according to the Bureau of Safety and Environmental Enforcement. Companies have evacuated 346 oil and gas production platforms and 41 drilling rigs.
Although the storm isn't expected to damage refineries, refinery owners often shut down operations in advance of a storm. The refineries will likely stay off line for about three days.
"The production centers in the Gulf can withstand those low-level hurricanes," said Gene McGillian, oil analyst for Tradition Energy.
Refineries consume enormous amounts of electric power and generate steam to cook crude oil into gasoline, diesel, jet fuel and heating oil. If a refinery loses power suddenly, operators can't properly clear the partially cooked oil out of pipes, and re-starting the refinery can take several days or even weeks. If refineries conduct what is known as an orderly shutdown, they can re-start as soon as the power supply is assured again.
About 1 million barrels per day of refining capacity is expected to be shut down, roughly half of the refining capacity in the potential path of the storm. The US consumes about 19 million barrels of oil products per day.
Phillips 66 is closing its 247,000-barrel per day refinery in Belle Chasse, Louisiana. Marathon Petroleum Corp. said it will operate its Garyville, Louisiana, refinery, which has the capacity to refine 490,000 barrels of oil per day, at reduced rates. Chevron Corp. is keeping its 330,000-barell per day Pascagoula, Mississippi, plant running as of Monday afternoon.
Oil was also knocked lower by speculation that the Obama administration will release oil from the Strategic Petroleum Reserve, the nation's emergency stockpile of oil. The White House has said a release is one option to combatting higher oil prices. Benchmark US oil has risen 22 percent since late June. Brent crude, which is used to price international blends that many US refineries use to make gasoline, is up 23 percent in the same period.
US gasoline prices have pushed up in recent weeks by the higher crude prices and refinery problems in the Midwest and West Coast.
Analyst and oil trader Stephen Schork said in a daily newsletter that gasoline could rise as high as US$3.90 a gallon (US$1.03 a liter) by early October, increasing the odds that the administration will tap the SPR in an effort to bring down oil and gasoline prices.
Oil was previously released from the SPR to offset price spikes due to the loss of oil production in Libya last year and after Hurricane Katrina battered the Gulf Coast in 2005.
But if oil production and refinery operations can quickly resume after the storm passes, gasoline prices could soon fall on their own.
Forecasts for Isaac have moderated, easing concerns that the storm could damage key oil and gas operations in the Gulf of Mexico. The National Hurricane Center now predicts it will grow to a Category 1 hurricane instead of a stronger Category 2.
Benchmark oil fell 68 cents to end the day at US$95.47 a barrel on the New York Mercantile Exchange. In London, Brent crude dropped US$1.33 to US$112.26 a barrel on the ICE Futures exchange.
About one-quarter of the US oil is produced in the Gulf of Mexico. As of yesterday afternoon, about 80 percent of Gulf oil production was suspended, according to the Bureau of Safety and Environmental Enforcement. Companies have evacuated 346 oil and gas production platforms and 41 drilling rigs.
Although the storm isn't expected to damage refineries, refinery owners often shut down operations in advance of a storm. The refineries will likely stay off line for about three days.
"The production centers in the Gulf can withstand those low-level hurricanes," said Gene McGillian, oil analyst for Tradition Energy.
Refineries consume enormous amounts of electric power and generate steam to cook crude oil into gasoline, diesel, jet fuel and heating oil. If a refinery loses power suddenly, operators can't properly clear the partially cooked oil out of pipes, and re-starting the refinery can take several days or even weeks. If refineries conduct what is known as an orderly shutdown, they can re-start as soon as the power supply is assured again.
About 1 million barrels per day of refining capacity is expected to be shut down, roughly half of the refining capacity in the potential path of the storm. The US consumes about 19 million barrels of oil products per day.
Phillips 66 is closing its 247,000-barrel per day refinery in Belle Chasse, Louisiana. Marathon Petroleum Corp. said it will operate its Garyville, Louisiana, refinery, which has the capacity to refine 490,000 barrels of oil per day, at reduced rates. Chevron Corp. is keeping its 330,000-barell per day Pascagoula, Mississippi, plant running as of Monday afternoon.
Oil was also knocked lower by speculation that the Obama administration will release oil from the Strategic Petroleum Reserve, the nation's emergency stockpile of oil. The White House has said a release is one option to combatting higher oil prices. Benchmark US oil has risen 22 percent since late June. Brent crude, which is used to price international blends that many US refineries use to make gasoline, is up 23 percent in the same period.
US gasoline prices have pushed up in recent weeks by the higher crude prices and refinery problems in the Midwest and West Coast.
Analyst and oil trader Stephen Schork said in a daily newsletter that gasoline could rise as high as US$3.90 a gallon (US$1.03 a liter) by early October, increasing the odds that the administration will tap the SPR in an effort to bring down oil and gasoline prices.
Oil was previously released from the SPR to offset price spikes due to the loss of oil production in Libya last year and after Hurricane Katrina battered the Gulf Coast in 2005.
But if oil production and refinery operations can quickly resume after the storm passes, gasoline prices could soon fall on their own.
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