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August 28, 2005
Katarina and the Oil Market Part 1
Crude oil soared to a record above $70 a barrel in New York after Hurricane Katrina forced companies including Exxon Mobil Corp. and Chevron Corp. to shut operations in the Gulf of Mexico. Oil had its biggest gain in 29 months while gasoline and heating oil reached records as Katrina, one of the most powerful storms to hit the U.S., crossed the Gulf, source of 30 percent of the country's oil output and 24 percent of its natural gas.``Forecasters are saying Katrina could do more energy damage than any storm in recent years,'' Jason Schenker, an economist with Wachovia Corp. in Charlotte, North Carolina, said before the start of trading.
``It's not just that there's going to be outages for the next couple of days. With shutdowns and damage at platforms and refineries, the bullish impact could be felt for the rest of the year.''
For those of you who watched the F/X show on an oil collapse, a hurricane that hit Louisiana started the upward price spiral. The area around Louisiana is crucial to a large amount of US oil operations.
Central to oil trading this summer is the incredibly tight supply and demand situation. Refineries are operating over 90% capacity.
Throughout the summer, oil prices have spiked whenever a refinery has gone down to non-routine maintenance. This is because traders are concerned about the refining industries inability to meet growing global demand.
As of now, there is no physical damage to the southeastern oil industry. Traders are bidding up oil on what might happen, not what has happened. Oil’s recent price spike is to be expected in this situation.
This will be a news heavy market for the next few days. Any indication of physical damage to the Louisiana oil infrastructure will probably send prices higher.
If you want to keep up on the latest news, I highly recommend Bloomberg television. If you don’t get it from your cable channel, you can watch it on the web via streaming media from their website.
I sit in front of a computer screen watching the markets during the day. If something drastic happens, I’ll get it out as fast as I can.
Posted by Hale Stewart at August 28, 2005 09:38 PM | Permalink
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Comments
I have a question (it's not a gotcha or critical, I just wonder if there's an answer I'm not seeing):
I understand that damage to crude production facilities will drive up the price of crude. Simple stuff.
Why should the fact that refineries are operating close to capacity drive up crude prices?
You're not the only person I've seen make that claim, and I see you state that traders are concerned about refiners' ability to meet global demand -- but that's global demand for refined products, not global demand for crude. I don't understand intuitively the connection being made between crude prices and refinery performance. Help?
Posted by: kevin whited at August 29, 2005 11:08 AM