SYDNEY (Reuters) – Oil prices surged to a record above $70 a barrel before easing on Monday as one of the biggest hurricanes in U.S. history churned through the Gulf of Mexico, forcing major oil producers and refiners to shut down operations.
U.S. crude oil futures jumped nearly $5 a barrel in opening trade to touch a peak of $70.80 a barrel, surpassing last week”s $68 high to the highest frontmonth price since the New York Mercantile Exchange (NYMEX) began trading contracts in 1983.
It later traded up $2.92 a barrel, or 4.4 percent, at $69.05, trimming early gains after Hurricane Katrina was downgraded to a still powerful Category 4 storm on the five-step Saffir-Simpson scale, with winds easing to 155 mph (248 kph), just 1 mph below the threshhold for a rare Category 5 storm.
Despite easing, Katrina — the 11th named storm of what is expected to be an unusually severe season — threatens to do lasting damage to vital U.S. oil and refining assets in the Gulf of Mexico, further straining an industry that has struggled to keep up with two years of strongly rising oil demand.
"Some fluctuations in strength are likely prior to landfall, but Katrina is expected to make landfall as either a Category 4 or possibly a Category 5 hurricane," the National Hurricane Center in Miami said in its latest update.
Oil product and natural gas prices also shot higher to records, with gasoline soaring 12 percent to $2.1575 a gallon and heating oil rocketing past $2.00 a gallon for the first time. Natural gas prices were up 20 percent.
More than 40 percent of all U.S. crude oil production in the Gulf of Mexico was reported closed down due to the hurricane, with the total expected to rise significantly as more operators report affected production to the U.S. government on Monday.
The full extent of the damage and how long it will affect supplies will only be known after the storm clears.
"We”re just going to have to wait and see what”s left," said Chevron Corp. spokesman Matt Carmichael.
Katrina is far stronger than last year”s Hurricane Ivan, which tore up platforms and pipelines along a very similar path through the Gulf, disrupting output for months.
The Gulf of Mexico normally pumps about 1.5 million barrels per day (bpd) of U.S. crude, a quarter of domestic output and equivalent to nearly 2 percent of global oil production, similar to the estimated spare capacity left within OPEC.
"We can expect two months of lost production, and coming in the peak-demand period this is the worst possible news," said David Thurtell, strategist at the Commonwealth Bank of Australia.
"The only way we can avoid yet higher prices is if President Bush releases supply from the Strategic Petroleum Reserve."
The administration has said in the past it would release oil from the 700-million-barrel SPR only during a serious supply disruption, but has never given further details.
"The Energy Department (DOE) is monitoring the situation," an administration official said in Washington. The DOE loaned out 5.4 million barrels last year after Ivan, which shut in a total 45 million barrels before full output was restored.
About a million residents around New Orleans fled as potentially catastrophic Katrina was expected to make landfall near the low-lying Gulf Coast city around sunrise on Monday after whipping up winds near 160 miles per hour (mph) (266 kph).
Apart from the impact on crude production, dealers fear the storm will tighten supplies of consumer fuels, which are much lower than relatively robust crude stockpiles and more difficult to replace given most refiners have been pumping flat out.
"Last year we had 15 million barrels more gasoline (stocks) than now," said Jim Ritterbusch, president of Ritterbusch and Associates in Illinois. "Given the already low stock levels most of price impact will be at the front of the gasoline curve."
Gulf Coast refiners produce about 45 percent of U.S. gasoline, he said, and they might struggle to restore operations amid power cuts and flooding, even if they escape damage.
Seven southeast Louisiana refineries with a combined daily refining capacity of 1.449 million barrels of crude oil had shut down ahead of Katrina making landfall, an amount equal to 8.5 percent of total U.S. refining capacity, operators said.
Two of those refineries near New Orleans — the 190,000-bpd Chalmette Refining LLC and Murphy Oil Corp.”s 120,000-bpd Meraux plant — appeared to be directly in the path of the storm.
"We”re all wondering, ”What am I going to have to come home to?"” said Barb Hestermann, spokeswoman for the Louisiana Offshore Oil Port (LOOP), which imports 1 million-bpd of crude, a tenth of total imports, and also shut down at the weekend.
Dealers are concerned about lasting oilfield damage as the Organization of the Petroleum Exporting Countries (OPEC), which controls half the world”s exports, is pumping near full capacity, leaving it little room to make up for any prolonged outages.
OPEC”s president said at the weekend high prices, which have jumped 60 percent this year, were of rising concern to the cartel, but that they should start to ease as higher costs begin to curb demand that has proven remarkably resilient thus far.
"OPEC will be exploring various options for the September meeting, which will hopefully contribute to moderate prices," OPEC President Sheikh Ahmad al-Fahd al-Sabah, also Kuwait”s oil minister, said in an English language statement in Kuwait City.
He did not elaborate on the nature of these options. OPEC meets on Sept. 19 to chart output policy.
Production elsewhere in the world was also under strain.
In Ecuador, where output has just returned to normal after being hobbled by a week-long protest, activists vowed on Sunday to resume protests within the next 48 hours if energy firms do not agree to increase local investment.