The power of hurricanes to drive up oil prices is diminishing as the proportion of US crude coming from the Gulf of Mexico falls to a 14-year low because of the increase in onshore shale production.
Oil prices were little changed in the week ended August 31 even as more than 90 percent of Gulf capacity was shut for five consecutive days with Hurricane Isaac hitting the region.
Oil jumped 44 percent in 2008 during Hurricane Ike and 14 percent in 2005 when Katrina devastated the Gulf Coast. Crude inventories rose a week after Isaac made landfall in Louisiana, while Katrina cut stockpiles for six consecutive weeks.
US oil production reached a 13-year high in July as growth in output from shale-rock formations, including the Bakken in North Dakota, bolstered supplies and sent inventories to the most since 1990.
Production in the federal waters of the Gulf will account for 21 percent of domestic output this year, the lowest level since 1998 and down from 29 percent in 2009, according to Energy Department data.
“The US supply story is shale production,” Harry Tchilinguirian, BNP Paribas’ London-based head of commodity markets strategy, said on Thursday. “It’s not so much about the Gulf, and the impact of hurricanes is just a temporary shutdown of production that should recover quite rapidly.”
Crude for October delivery gained as much as 2 percent to $100.26 (R835.35) a barrel in electronic trading on Friday on the New York Mercantile Exchange. Prices increased 0.3 percent in the week ended August 31.
Isaac, a Category 1 hurricane, made landfall on August 28, shutting in as much as 1.31 million barrels a day of production on August 30, or 95 percent of the region’s capacity, according to the Bureau of Safety and Environmental Enforcement.
Closures remained above 90 percent, or more than 1.2 million barrels a day, in the week to September 1. About 36 percent of Gulf output was still shut on September 7.
“Storms aren’t going to cause as much damage as they used to,” Kyle Cooper, the director of commodities research at IAF Advisors in Houston, said. “The Gulf is still an important part of the US oil market but its significance has been declining over the past few years.”
There were no storms threatening production in the Gulf of Mexico last week.
Tropical Storm Nadine, the 14th named system of the Atlantic season, was 1 235 kilometres east-southeast of Bermuda and posed no threat to land, the National Hurricane Center said on Friday in its latest advisory.
Isaac cut a total of 10.5 million barrels of oil supply from the Gulf, according to LCI Energy Insight, an energy analysis firm in El Paso, Texas.
“Obviously the Gulf is producing less oil and storms are not going to have the immediate price impact that we’ve seen in the past,” Luke Larson, the vice-president at LCI, said on Thursday.
Ike and Katrina cut more oil production than Isaac and caused more damage to offshore platforms.
Oil prices surged to $130 a barrel on September 22, 2008, from as low as $90.51 six days earlier after Ike, a Category 2 storm, made landfall on September 13 near Galveston, Texas, less than two weeks after Hurricane Gustav hit the region.
Ike cut 21.5 million barrels of oil from Gulf production, according to the Energy Department.
Katrina, which went ashore on August 29, 2005 as a Category 3 storm, curtailed 30.2 million barrels of output. Oil prices jumped to $70.85 a barrel on August 30 from as low as $62.25 on August 18.
The Gulf is better able to withstand storms as oil companies upgraded their facilities after Katrina. Offshore production was also in decline as the moratorium imposed after the BP oil spill slowed the development of deep-water fields.
“A lot of these platforms have been upgraded after the events that we’ve seen in 2005, so they are in a better position to endure adverse weather conditions,” Tchilinguirian said. “If you would have a bearing on the market you need permanent shutdowns.”
Gulf output is forecast to fall to 1.3 million barrels a day this year from 1.56 million in 2009, according to the Energy Department. Output in the lower 48 states, excluding the Gulf, is forecast to grow to 4.51 million barrels a day, the most since at least 1993.
“If it had not been for that drilling moratorium, Gulf production would have been higher,” said James Williams, an economist at WTRG Economics, an energy-research firm in Arkansas. “It’s going to take another two or three years to get Gulf production back to where it was.”
The six-month drilling ban in waters deeper than 152 metres, imposed after BP’s Macondo well off Louisiana blew out April 20, 2010, was lifted in October of that year.
Shale oil has been boosting US domestic production amid slower drilling in the Gulf. Total production increased to 6.36 million barrels a day in the week ended July 20, the most since February 1999, according to the department.
Crude inventories rose to 387.3 million in the week ended June 15, the most since July 1990.
“A lot of the growth that we’re going to be seeing in the domestic oil production is going to be coming from onshore rather than offshore,” Adam Sieminski, the head of the Energy Department’s Energy Information Administration, said at a Bloomberg Government lunch on August 22.
Production in North Dakota jumped to 660 000 barrels a day in June from 386 000 a year earlier, according to the department. Texas, the biggest producing state, increased to 1.9 million barrels a day, up from 1.41 million a year earlier.
“What’s happening in North Dakota is incredible,” John Felmy, the chief economist at the industry-funded American Petroleum Institute, said. “There is no question that the industry is still committed to the Gulf.”
Imports from Canada are also reducing reliance on the Gulf. The country, the biggest oil exporter to the US, shipped a record of 2.52 million barrels a day to its neighbour in February, according to Energy Department data. – Bloomberg