Isaac Passes With Little Damage

Jim Brown
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Hurricane Isaac has moved farther inland and has been downgraded to a tropical storm. The damage appears to be limited to trees, flooding, power outages and some normal wave damage to installations around the ocean front.

The initial reports of damage has 630,000 homes without power as well as several business districts and refineries. This was expected and the reason several refineries shut down ahead of the storm in order to allow for a graceful restart. Once power is restored they should have no problems returning to full production almost immediately. No refineries have reported any material damage.

According to the EIA 936,500 bpd of refining capacity is off line. Another 1.716 mbpd were operating at reduced capacity. Those refineries waiting for Isaac to pass and power to be restored include:

Chalmette 192,500
Motiva 235,000
Phillips 66 247,000
Valero 205,000
Placid 57,000

The production platforms in the Gulf will not begin restarts until Thursday. While the storm has moved onto land the wind/rain bands extend up to 250 miles from the center of the storm. Tonight that means high winds and rain extend about 200 miles south from New Orleans. As Isaac moves further inland at its current speed of six miles per hour those trailing winds will diminish. That will allow the helicopters and supply ships to begin hauling people back out to the 503 production platforms that were evacuated. After initial damage checks they will be restarted and that process takes 48 to 72 hours in most cases for the large platforms.

The BSEE reported that so far there have not been any reports of material damage to any production platforms but until personnel have been returned and onsite checks performed we will not know for sure. Isaac was a low intensity hurricane and most platforms are built to withstand the 75 mph winds Isaac produced.

The EIA reported this afternoon that 1,287,275 bpd of oil production was off line and 3.0 Bcf of gas was shut in. Natural gas processing plants with the capacity of 7.5 Bcf were offline due to power and shut downs elsewhere in the system. Fourteen gas pipelines and four crude pipelines were shut down due to power or flooding.

Here is the latest report from the EIA showing all the land based shutdowns in the wake of Isaac. EIA Situation Report PDF

WTI Crude prices declined -1.22 today as a result of a strong build in inventories and the lack of any material damage in the Gulf. Support has formed at $95.

Crude oil inventories rose by 3.8 million barrels for the first gain in five weeks after nearly a 20 million barrel decline. Inventories will be expected to decline next week due to the shutdown of the Gulf facilities and the halt to imports due to the storm. Tanker drivers will have throttled back to idle outside the Gulf as the storm approached from east of Cuba. That means about a week of deliveries will be delayed and appear in a bunch the following week. Next Wednesday will show a decline but the following Wednesday should show a large increase.

Ironically the surge in inventories this week was caused by a +1.3 mbpd surge in imports from 8.2 mbpd to 9.5 mbpd. That is an extra 9.1 million barrels more than the prior week. It is no wonder crude levels rose.

Crude Oil Inventory Chart

Gasoline inventories declined by -1.5 million barrels as a result of a drop in imports of -87,000 bpd and a drop in production of -138,000 bpd. Now that the driving season is ending the production of gasoline will decline. Refineries will begin to schedule maintenance ahead of the switch over to winter fuel blends.

Gasoline Inventory Chart

Distillate inventories rose by 900,000 barrels and the third weekly gain. Inventories are now 19.2% below year ago levels and still tracking below the five year range. According to the chart below we should be seeing distillate inventories top ahead of the drawdown of heating oil ahead of winter. Diesel demand has not accelerated this year and suggests the economy is still sluggish. Cleanup and rebuilding efforts in the wake of Isaac will consume additional diesel in the weeks ahead. Airline cancellations as a result of Isaac will also result in an increase in distillates over the next couple weeks. Jet fuel will be backing up in the system as a result of the 2,000 flight cancellations. The impact will only be temporary.

Distillate Inventory Chart

Inventories in Cushing declined slightly but the pipeline shutdowns around the Gulf could force a backup into Cushing for next week. The Seaway pipeline is only 150,000 bpd but it feeds into the pipeline network around the Gulf so they may have had to slow it down temporarily.

Inventory Snapshot

The EIA has a map showing all the oil installations in the Louisiana area with the storm track for Isaac. The first map below shows only the oil installations. The second map includes all the gas installations plus the pipelines. Clearly gas production is a major business in the Gulf area.

Oil Installations in the Gulf

Oil and Gas Installations and Pipelines in the Gulf

We are probably going to see hundreds of headlines about the impact of Isaac on the energy sector over the next week. There have been several already pondering a release of SPR oil by the president. No official comment has been made but they probably want to hear more about the damage before crawling out on that political limb.

The IEA continues to lobby against a release with the head of the IEA repeating on multiple occasions "We don't have a disruption of supply." If the EIA can make a case for a supply disruption after Isaac then the IEA may have to cave in to the G7 demands. In case you did not see it over the weekend the G7, through the Treasury Dept, called on the producing countries to produce more and the 28 member countries in the IEA to be prepared to release reserves to counter high prices and the impact to the global economy. The IEA again said the U.S. has NOT contacted them about a release of strategic reserves.

If these headlines continue we could see pressure on prices even if they don't actually release anything. Obviously if the U.S. administration acts unilaterally it will impact prices locally. The driving season is ending this weekend and even without any release the prices should decline for several weeks. The key word there is "should." We still have the geopolitical events in the Middle East to provide support.

The Fed Beige Book and the GDP report today were both better than expected and could keep Bernanke from giving any major clues to the next QE program when he speaks on Friday. However, Bill Gross said in an interview on Bloomberg today that the Fed will announce a new QE program soon even if Bernanke is quiet on the subject on Friday. Gross said the dual mandate of stable prices and low unemployment is not being met and the Fed will continue easing in some form until unemployment is under 7%.

The Nonfarm Payrolls are Friday the 7th and the FOMC meets the following Wed/Thr. The threat of a possible QE announcement should keep the dollar weak, depending on Bernanke's comments this Friday, and a weak dollar will be support for crude prices even in a declining demand market.

Historically prices decline over the next several weeks before they rise into the winter months on heating oil consumption. I would look to buy the dip using energy equities on any decline in crude under $90.

Jim Brown

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