Crude oil jumped to a new record high of $70.80 a barrel before settling back to the $67-level, indicating a knee-jerk reaction by traders as Hurricane Katrina plowed into the Gulf Coast today, forcing a shutdown of oil rigs and refineries in the area.
“We’re going to see short-term spikes and we’ll have to wait and see the long term implications [of the storm],” Denton Cinquegrana, markets editor for Oil Price Information Service, told Fleet Owner. “It may turn out that the only damage would be the loss of production when they had to take the rigs down as the storm passes through.”
According to energy experts, it could be a couple of days before a full damage assessment on the rigs, refineries and pipelines can be made. This will determine whether there will be a long-term impact on diesel prices.
Crude oil’s jump to $70.80 represents a $4 jump the same day, Cinquegrana noted. “I never seen crude move like that. During a storm like this, everybody enters into panic mode. But [the market] has calmed down from last night and where we started this morning. Now it’s just a waiting game to see if there’s actual logistical damages that would have long-term consequences.”
Current diesel pricing patterns have been consistent with movement in oil prices, energy experts say.
“Due to strong inventory builds, all the increases in diesel prices have been related to crude oil price adjustments,” Jacob Bournazian, Energy Information Administration (EIA) economist told Fleet Owner. “That means diesel prices are at equilibrium, absent of a strong demand in the system.”
However, refinery outages have also played a huge factor, especially in the West Coast and California regions. For example, within a week of the shutdown of the big Chevron El Segundo refinery in California in late July, EIA reported a diesel price jump of 28.6 cents before breaking the $3-level shortly after.
The aftermath of Hurricane Katrina could very well mirror that of last September’s Hurricane Ivan.
Hurricane Ivan caused oil markets to jump 10 cents to set a new record high of $2.012. Crude oil then exceeded the $50 per barrel barrier for the first time and the Bush Administration responded by tapping the strategic petroleum reserve. Meanwhile, the Organization of the Petroleum Exporting Countries (OPEC) pledged to boost oil production.
“[The Gulf Coast] is certainly among our most important source of oil production,” Bournazian explained. “We produce 5.5 million barrels a day and we import about 10 million barrels per day (bpd). Last summer we were down 200,000 bpd day for two months. Even the loss of 100,000 is enough to cause the markets to react strongly. Right now there’s just enough production to meet demand.”