Katrina and Oil Prices

In a worldwide situation where oil production and consumption were already close to equilibrium, Katrina couldn’t have hit in a worse place at a worse time.  More than two weeks after the storm’s slamming of the Gulf of Mexico’s oil and gas production and distribution infrastructure 57 percent of the region’s crude oil output and 5 percent of the country’s refining capacity remains out of commission.   The US government’s reaction to the resulting run-up in gasoline prices has been to release oil from the country’s strategic oil reserves – some 1.3 million barrels a day over the next 30 days.  The country’s remaining operating refiners can probably squeeze a few more gallons by temporarily suspending unnecessary maintenance and delaying seasonal fuel mix changeovers.  At the same time the post-storm run up in gasoline prices combined with an end to the summer driving season is taking a bite out of demand.  Already we spot crude prices dropping back to pre-Katrina levels. 

For the potential investor in domestic oil and gas drilling projects the key question now is what will be Katrina’s long-term impact on oil and gas prices.  While no one can predict this with certainty, it seems obvious that there will be an immediate slowing of the US economy with a secondary negative ripple on the major economies outside the US.  Shrinking economies will reduce worldwide demand for oil and gas.  How long this will last is anyone’s guess.   Some economists see a rebound in the US economy in the fourth quarter of this year or the first quarter of next.  Certainly, the government’s potential infusion of over $100 billion with similar payouts by insurers will help fuel the domestic economy.  At the same time high gasoline prices will probably continue because of the pre-Katrina refinery bottleneck and that alone will cut into the US demand for oil as most of the US drivers decide to use their better gas mileage vehicle, carpool, combine shopping trips, etc.   Personally, I think we can expect world oil prices to stay in the $55 to $65 range for the next 12 months.  But prices could test the lower end of this range depending on speed of economic recovery.  As I noted in my previous blog, domestic natural gas prices are on a different track from oil and should remain at current levels or even rise somewhat. 

My best advice to the potential investor continues to be to look for oil and gas drilling projects that make sense at $30 a barrel and/or $3 gas.

Comments

[jacobroder]

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Check out the video they have on the page.

Cheers

Jacob Roder