Following on this post from yesterday, the markets continued to react to more information that indicates that damage to Gulf of Mexico offshore production and drilling facilities from the recent hurricanes is going to reduce production and exploration from that key region for an extended period of time.
That information, combined with the slow process of restarting Gulf Coast refineries, is generating one of the more unusual political ironies that America has seen in some time. As a result of the restricted energy supplies from the Gulf region, the outspokenly pro-exploration and production Bush Administration is sounding eerily like the Carter Administration from the late 1970’s, promising a national energy-conservation campaign to give Americans tips on saving energy during the winter heating season.

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Following on this post from yesterday, Chevron Corp.’s announcement that its Typhoon tension leg platform was severed from its moorings by Hurricane Rita and is floating upside down in the Gulf of Mexico dovetailed with the news that natural-gas futures on the New York Mercantile Exchange skyrocketed 10% to almost $14 per million British thermal units, which is its highest closing on record.
Thus, if it’s going to be a long, cold winter in the U.S. hinterlands this winter, then it’s looking increasingly as if it’s going to be a long, cold, expensive winter.
Natural-gas futures on the Nymex for delivery in October rose $1.251 to $13.907 per million BTUs. The expiration of the October contract at the same time that the delivery point for Nymex futures, Louisiana’s Henry Hub, which has been closed down for the past week, added to the uncertainty and volatility in the market.

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This Financial Times article reports that preliminary assessments of the damage that Hurricane Rita caused to offshore oil and gas drilling and production facilities reflect that the damage is greater any other storm in history.
Rita’s path — which was west of the path of Hurricane Katrina last month — tore through an area of the Gulf of Mexico that contained a large amount of exploratory rig activity. Given the apparent damage to the rigs, the biggest impact from the storm may be that it will exacerbate an already tight market for rigs in the region. As a sign of just how precious rigs are becoming to the market, The Woodlands=-based Anadarko Petroleum Corp., one of the biggest U.S. independent exploration and production companies, raised eyebrows in the energy industry earlier this week by committing to a rig six years in advance.
Oh, how times have changed in the exploration and production business.

It’s been a helluva past month in Houston.
First, the Houston community responded to the worst natural disaster in America in decades by taking in tens of thousands of evacuees (posts here, here and here) from New Orleans and the central Gulf Coast who had almost everything but their lives. Then, as that relief effort was winding down, Houston confronted Hurricane Rita, a category 5 storm bearing down for a direct hit on the city. Implementation of the city’s evacuation plan led to an estimated 2.7 million Houston area residents hitting the road, resulting in unprecedented traffic gridlock and gasoline shortages throughout the region. After Rita veered off to the east to make landfall on the Texas-Louisiana border, Houston is now dealing with the not insubstantial problem of how to have 2.7 million people return to their homes in the region without experiencing the same type of gridlock and shortages that occurred when they left.
Whew!

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With the eastern shift of the projected path of Hurricane Rita directly into the part of the Houston metro area that contains a huge number of some of the nation’s largest oil refineries and petrochemical facilities, Rita’s economic ripples have now turned into waves with the distinct possibility that they could turn into an economic tsunami.
It now appears almost certain that Rita will substantially disrupt operations at a significant number of the oil refineries that transform crude oil into gasoline, diesel and other products. The only question is how long those facilities will be down and how much gasoline prices will increase as a result of the shutdown. At least eight refineries in the Houston area will shut down soon as they began scaling back operations yesterday. Inasmuch as four refineries in Louisiana and Mississippi have been closed as a result of damage from Hurricane Katrina last month, almost 20% of U.S. refining capacity will shutdown with the closing of the Houston area facilities, which will only reduce already tight inventories of gasoline that have pushed prices to record levels. To make matters worse, the new projected path of the hurricane would also cause probable extensive damage to offshore oil and natural gas platforms and pipelines that were west of the ones that were damaged in Katrina’s path. I think it’s safe to say now that the U.S. energy industry has never had to deal with anything on the magnitude of the 2005 hurricane season.

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Crude-oil prices surged on Monday as it became clear that Tropical Storm Rita would threaten the Gulf Coast, then prices fell on Tuesday morning when the National Hurricane Center forecast a more southerly path for Rita that might spare the Houston area, and then yesterday afternoon and overnight, prices rose again as the storm evolved into a major hurricane.
Such are the vagaries of predicting hurricane tracks and commodity markets.
Oil prices settled Tuesday afternoon more than $1 a barrel lower than Monday’s closing price as early Tuesday projections had Rita coming in closer to Freeport so that the brunt of the storm would miss the Houston area refineries. Those initial reports triggered a drop of more than $2 a barrel in oil prices, but those prices recovered quickly during the day as Rita strengthened into a major hurricane and evacuations from offshore rigs picked up. At the New York Mercantile Exchange, the October crude contract ended $1.16 lower from its Monday high at $66.23. October gasoline closed at $1.9766 a gallon, down 6.61 cents for the day and October heating oil, up more than 20 cents Monday, ended at $2.0113, down 2.71 cents.

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