Hurricane Gustav not as bad as feared, oil prices fall
Hurricane Gustav weakened to a Category 2 storm as it hit the Louisiana Gulf Coast, a smaller and weaker hurricane than Katrina or Rita. On Saturday when Gustav whirled to almost Category 5 strength, many analysts worried that Gustav may damage rigs and pipelines enough to reduce production by 50 million barrels over the next few months (similar to the level of Katrina and Rita in 2005). But from the first reports of minor flooding and damages, Gustav appears to be more similar to Hurricane Isidore of October 2002 which reduced production by 10 million barrels. And a 10 million barrel output reduction was already forecast by the EIA in its Short-Term Energy Outlook for this year. So, the hurricane ended up being more status quo than threatening. This allowed the focus to drift to the strengthening dollar and slow global economic growth and oil prices slid toward $105 per barrel.
But we still don’t know what the overall effect of Gustav will be. By the middle of next week, the EIA will report that our crude oil, gasoline and other refined products are very low compared to historical averages at this time of year. Prices may swing up once the details emerge.
And the fact that three more tropical storms are brewing in the Atlantic (Hanna, Ike, and Josephine) may mean that the Gulf oil producing area gets hit a second time in 2008. Such a hit would, like Rita, send inventories down and prices up.
Another bullish factor came from the report today that Russian oil production continued to decline. In August, production was down .9% from last year at 9.82 million barrels per day. The supply focus will turn now to next week’s OPEC meeting as they decide whether to keep production flat or curtail it slightly to prevent oil from potentially falling below the $100 level they have enjoyed since the beginning of this year.