Officials of oil and gas companies and refineries with facilities in the path of Hurricane Katrina were scurrying around yesterday somewhat helplessly attempting to evaluate the extent of the storm’s damage on key oil and natural-gas production facilities that rattled energy markets early yesterday. The bottom line is that it’s going to take at least a few days — and perhaps weeks — to assess the damage fully and determine how long those facilities will be off-line.
Oil futures surged past $70 per barrel in overnight electronic trading on Monday, but fell back during the day. Oil for October delivery settled at $67.20, up $1.07 from Friday’s price, but still below the previous record. When adjusted for inflaction, oil prices overall are still well below the high of $95.26 reached in April 1980.

Meanwhile, Hurricane Katrina set off a frenzy in the natural-gas trading pits, where the New York Mercantile Exchange imposed unprecedented emergency restrictions. Inasmuch as the U.S.’s major natural-gas-delivery terminal — Louisiana’s Henry Hub — shut down early Sunday evening and did not reopen until midday yesterday, the Nymex Exchange declared an extremely rare “force majeure” delay of deliveries against its futures contracts. Although the force majeure declaration likely would cause only a minor delay in delivery on about 100 contracts (affecting a relatively small amount of $11 million in gas deliveries), such declarations nevertheless cause jitters in the gas markets that can affect prices.
Nymex gas futures for September delivery soared to a high of $12.07 per million British thermal units and settled up nearly 11% at $10.847, which was a record finish. The natural gas supply chain is particularly vulnerable to disruption because it must be moved at high pressure through specific delivery points and pipelines, while oil and other liquid fuels can be transported by truck, if necessary.
Another problem is that the nine Gulf Coast refineries that were shut down because of Katrina cannot be re-started by just flipping a switch. As noted in this Oil Drum post, restarting a refinery is a complicated process and, even in the best case, will require a period of several days to get back to 100% refining capacity. As noted yesterday, the Gulf region now supplies roughly one-quarter of the oil and natural gas consumed in the U.S. The New Orleans area alone is responsible for about 12% of domestic refining capacity that turns crude oil into gas for autos, jet fuel, heating oil and other products.
As the storm moved onshore, oil and gas companies began dispatching planes and divers into the Gulf of Mexico to begin evaluating the damage to rigs, pipelines and production platforms. Royal Dutch Shell PLC reported that two drilling rigs it had under contract — Transocean’s Nautilus and Noble Corp’s Jim Thompson — had been moved by the storm (the rigs are designed to float), but did not appear to be extensively damaged. Likewise, a BP PLC official fly-by inspection on Monday afternoon of several deepwater platforms also showed no significant damage. However, what takes more time to assess is possible damage to underwater pipeline infrastructure, which was already damaged last summer by underwater mudslides that resulted from the much smaller Hurricance Ivan.
Finally, don’t miss Clear Thinkers favorite James Hamilton’s piece on why Katrine could have a much bigger effect on the price of gasoline and natural gas than on the price of crude oil.