1.

CRUDE OIL SUPPLIES OVERWHELM REFINERIES
By Carola Hoyos (New Orleans) and Javier Blas (London)

Financial Times (UK)
September 8, 2005

http://news.ft.com/cms/s/3a9a2dfe-209e-11da-81ef-00000e2511c8.html

The U.S. and Europe are releasing more emergency crude oil than refineries in the Gulf of Mexico can handle, reinforcing suspicions that governments are using the crisis triggered by Hurricane Katrina to cap record oil prices.

U.S. refineries will on Friday begin to bid for the 30m barrels of crude oil that the U.S. government is releasing from the its emergency reserves but, with many refineries disabled, analysts say the additional supply may not be needed.

“I will not be surprised if they don't bid for all the barrels,” said Katherine Spector, of JPMorgan in New York.

Data released on Thursday suggested that, while petrol is in short supply, oil companies still have plenty of crude in their inventories. The companies' stocks fell 6.45m barrels last week, significantly less than the 13.6m barrels of production capacity lost to the hurricane suggesting that the shortfall did not warrant the scale of the governments' responses.

President George W. Bush has insisted that the U.S. Strategic Petroleum Reserve, which holds nearly 700m barrels of crude oil, will release supplies to relieve shortages, not to depress prices.

The same line has been taken by the International Energy Agency, the industrial countries' oil watchdog, which last week announced a 2m-barrels-a-day emergency release for the next 30 days. That total of 60m barrels includes the 30m barrels from the U.S.'s SPR. Société Générale, the Paris-based bank, estimates that the emergency stocks released more than cover last week's loss of crude production and the continuing losses expected over the next 40 days.

Frédéric Lasserre, the bank's chief oil analyst, said the emergency stocks of crude released covered 154 per cent of the lost production.

The excess oil comes on top of commercial crude inventories in the U.S. that are well above 2004 levels and the average over the past five years.

But Mr. Lasserre said emergency stockpiles of petrol released by Europe only covered half the loss caused by Hurricane Katrina.

Five U.S. refineries, with a combined capacity of more than 1.1m b/d, 5 per cent of the country's total, were still closed on Thursday.

Samuel Bodman, U.S. energy secretary, said it would take “at least three months” to get them producing. Refineries process crude oil into petrol, diesel, jet fuel, and other products, so shutting down a refinery reduces the need for crude but also curtails the supply of petroleum products.

In spite of that, more than 60 per cent of the total international emergency stocks that are being released consist of oil, with petrol accounting for 18.7 per cent. The rest is heating oil and fuel oil.

The U.S.'s SPR only contains crude oil, while European countries stock both oil and petroleum products.

Mr. Bush criticized the Clinton administration for using the SPR in 2000 to manipulate markets and refused to tap it as prices reached records and pressure from Democrats grew earlier this year. But shortly before the hurricane, oil prices rose to $60 a barrel and there were signs that high oil prices were affecting the economy in the U.S. and beyond.

Wal-Mart warned that its bottom line was suffering because record petrol prices meant its customers had less money to spend in the stores. Meanwhile Asian countries, such as Indonesia or the Philippines, began to blame the decline in their growth and the value of their currency on high oil prices. U.S. oil prices rose 12 cents on Thursday to $64.49 a barrel.

2.

International Economy

Oil

OIL SPILLAGES THREATEN GULF OF MEXICO
By Henry Hamman

Financial Times (UK)
September 8, 2005

Original source: Financial Times (UK)

SEWANEE, Tenessee -- Oil storage tanks ruptured by Hurricane Katrina may have dumped as much as 3.7m gallons of crude oil into the lower Mississippi river and surrounding wetlands.

Officials estimate the spillage at roughly a third of the volume of the huge spill when the tanker Exxon Valdez ran aground off Alaska in 1989. Last night experts said they could not yet assess the short-term effects of the spills but were hopeful there would be few long-term effects. Some of the oil is expected to find its way into the Gulf of Mexico.

But officials at the Louisiana Department of Environmental Quality remain cautious because it is difficult to gain access to the area, which can be reached only by water. It is also unclear how much oil has been lost.

The largest spill, believed to be about 3.3m gallons of crude oil, occurred after two 80,000-barrel storage tanks ruptured at a Bass Enterprises Production site at Cox Bay, Louisiana, just above the mouth of the river.

The tanks were not full at the time of the rupture, a company executive said. Nevertheless, if current estimates prove correct, the spill would be big as a 1969 incident following a blow-out at an offshore well near Santa Barbara, California. That accident is seen as seminal to the development of the U.S. environmental movement.

The second spill at the Murphy Oil Corporation refinery at Meraux, Louisiana, is thought by state officials to have released 420,000 gallons of crude into a flooded area around the refinery. The Murphy spill was discovered by aerial surveillance a few days ago. The Coast Guard, the federal Environmental Protection Agency and a clean-up contractor are working at the site to contain the oil. Contractors have also been dispatched to the Bass spill.

Eric Olsen, a spokesman for the National Resources Defense Council, said the environmental group was attempting to monitor the clean-up and remained concerned about possible threats to drinking water. In recent days concern has mounted over toxic water in New Orleans. The polluted water is being pumped into Lake Ponchartrain, where it is likely to cause significant short-term environmental damage.

Frank Manheim, an associate professor at Virginia’s George Mason University and an expert on pollution in Lake Ponchartrain, said the environmental impact “probably will not be very long lasting but it may be severe in the short term.” Experts said Ponchartrain -- an estuary on the Gulf -- should not suffer significant long-term damage.

But Prof. Manheim, a former geochemist at the U.S. Geological Survey, said the floodwater could be polluted with “things that are serious that we don’t know about,” including pesticides and toxic chemicals.

3.

U.S. RAISES WINTER OIL FORECAST TO NEAR $70
By Javier Blas

Financial Times (UK)
September 8, 2005

Original source: Financial Times (UK)

LONDON -- The U.S. government on Wednesday raised its crude oil price forecasts for this winter to near $70 a barrel, and above $60 a barrel for 2006, and said U.S. energy expenditures for 2005 would reach their highest level in 18 years.

The U.S. Energy Department said that the jump in oil, natural gas, petrol, and heating oil prices would increase this year’s national energy expenditures to 8.3 per cent of gross domestic product, up from 6.2 per cent in 2002.

“Dramatic increases in domestic energy costs, assisted by everything from tight world oil markets, to blistering summer heat, to the ravages of Hurricane Katrina, have made for an exasperating summer for many consumers and have set the stage for a potentially expensive winter heating season,” the department said in its monthly markets report.

Before the hurricane, the Energy Information Administration -- the department’s statistics office -- had forecast oil prices averaging $56.70 a barrel in 2006.

EIA forecasts now show oil prices averaging $63.50 a barrel next year.

The report said that oil supply from the Gulf of Mexico was not expected to recover until November or December, but that lower energy demands would surface, as high oil and natural gas prices begin to slow economic growth.

“Hurricane Katrina caused significant direct damage to offshore rigs, refineries, pipelines, and ports in the Gulf of Mexico, with widescale electricity outages and flooding exacerbating the already devastated infrastructure, compounded by the evacuation of thousands of employees,” the EIA warned.

Oil and petrol prices rose yesterday as the International Energy Agency, the industrial countries’ oil monitor, revealed that petrol would make up less than 20 per cent of the emergency stockpile 2m barrels a day release approved last week.

The bulk of the stock draw will be crude oil, with middle distillates such as heating oil, diesel, and fuel oil also accounting for a large share.

U.S. oil futures lost ground on Wednesday owing to prospects of lower oil demand as high energy prices slow the U.S. economy.

On Nymex, West Texas Intermediate crude contracts for October delivery lost $1.59 in late trading, ending the day at $64.37 a barrel.

Norman Mineta, U.S. transportation secretary, said on Wednesday that U.S. regulators were considering a suspension of the 7.5 per cent ticket tax paid by airline passengers, a move that would help carriers more easily raise fares and recoup some losses blamed on soaring fuel prices, Reuters reports from Washington.

4.

Markets

Investor's Notebook

Market Insight

HURRICANE HIGHLIGHTS REFINING SHORTCOMINGS
By Kevin Morrison

Financial Times (UK)
August 31, 2005

http://news.ft.com/cms/s/93f58058-1a34-11da-b279-00000e2511c8.html

The rise in oil prices to $70 a barrel after Hurricane Katrina swept through the Gulf of Mexico has highlighted the fact that the US refinery industry is unable to handle short-term supply disruptions. This is likely to keep oil prices high for several years.

The hurricane has shut nine refineries with a combined capacity of 2m b/d or about 12.5 per cent of U.S. refining capacity. It has also shut 1.4m b/d of crude oil production, or about 90 per cent of U.S. Gulf of Mexico output, and 88 per cent of the region’s natural gas.

With U.S. refineries producing near capacity and the amount of oil output lost equivalent to the world’s spare oil production capacity, the industry is vulnerable to price spikes as there are few options to overcome a significant supply disruption.

The 33 per cent rise in U.S. petrol futures this week to a record $2.5700 a gallon, which equates to a staggering $108 a barrel, was the key driver behind the oil price rally to record levels. As refiners see their petrol making margins rise above an eye-popping $30 a barrel, traders have pushed crude oil prices higher to get a slice of the bonanza.

“When you see refiner margins this high, there is little doubt that the oil price rally is a result of a loss of capacity in the U.S. refining industry,” said Francisco Blanch, energy strategist at Merrill Lynch.

U.S. crude futures hit a record $70.85 a barrel on Tuesday, before slipping yesterday to $69.35 after the US government said it would loan refiners oil from its special petroleum reserve. Oil traders still expect the US oil benchmark, West Texas Intermediate contract to remain above $65 until the end of 2007, and above $60 until 2011.

Up until two years ago, long term oil prices remained in the low $20s, but this has changed as oil demand has outpaced new capacity in global oil production and petroleum refinery output, creating a very tight oil supply market. Energy analysts say this is unlikely to change in the foreseeable future.

Philip Verleger, an independent petroleum economist, said the $40 rise in oil prices since the end of 2002 represents a bubble that is going to burst as energy costs will account for a greater slice of disposable income, which in turn will reduce demand and eventually prices.

He said energy costs accounted for seven per cent of household income in 1960, nine per cent in 1980 during the second oil crisis, and were about 4 per cent last year. He said petrol, power, and natural gas prices had doubled since last summer and were taking a larger share of household spending.

Mr. Vergeler said U.S. retail petrol prices would have to rise to about $5 a gallon, up from about $3 at present before they will really start to lower demand.

“If we didn’t have a housing price boom, we would not have had a oil price boom because U.S. demand would have been a lot lower than current levels,” Mr. Verleger said. U.S. oil demand growth has averaged 1.6 per cent over the past four years, one of the highest growth rates in developed countries.

“The oil price bubble will burst when the U.S. housing market either slows down dramatically or collapses,” Mr Verleger said.

Jim Steele, a commodities analyst with Refco in New York, said the oil market is now at a tipping point, with greater attention paid to alternative fuel sources and energy efficiency.

“No longer do you have oil ministers talking about oil prices, but finance ministers, prime ministers, and presidents and when that starts to happen, it means people are worried and we can start to see policy changes that will eventually lead to a lowering in the rate of demand growth,” said Mr. Steele.