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As the Texas Gulf Coast begins to recover from Hurricane Ike, the energy industry is assessing the extent of damage to production facilities and other infrastructure. At this point, many oil and gas installations appear to have escaped debilitating damage, but power outages and the disruption to working routines will need to be overcome before there is a full return to normal operations. As of September 17, about 1.2 mbd remains closed, equivalent to 24 percent of the country’s total crude oil output. However, despite the impact on supply, the oil market’s focus remains on global economic worries, especially given the severe stress facing a number of large financial institutions. Oil prices have fallen below $100 per barrel amid financial and macroeconomic concerns and weak oil demand, particularly in the US and Europe. Since the end of August oil prices have fallen around $15 to $25 per barrel.
Although supply anxiety has been pushed aside as a top concern in the oil market the world’s cushion against supply shocks remains thin. Spare global crude oil production capacity is hovering around 2 million barrels per day—equivalent to around 2.3 percent of world oil supply. In addition to upstream concerns, the length of time it takes refineries to resume operations will influence the direction of US gasoline prices. Nearly five days after the hurricane hit the Houston area, about 3.0 mbd of US refining capacity remains closed. With gasoline inventories at their lowest level since 1990, an extended refinery outage could lead to upward pressure on oil prices.
Natural Gas: Limited Impact on Price
In the aftermath of Hurricane Ike the gas industry is striving to resume normal operations as quickly and safely as possible. Production ramp-up at each facility will vary, depending on damage assessments and repairs, as well as downstream infrastructure readiness—primarily gas processing plants. Many facilities that were shut-in from Hurricane Gustav had not yet returned to service as they were still being inspected for damage. According to the MMS 6.0 Bcf per day of Gulf of Mexico production was shut in as of September 17, 2008 — an estimated 82 percent of the 7.4 Bcf per day of natural gas production from the Gulf of Mexico. Since the initial shut-ins began in preparation for Hurricane Gustav, an estimated 114 Bcf of cumulative production has been lost.
Despite the reduction of supply available to the market the impact on prices remains muted as expectations are that most gas infrastructure escaped major damage. Spot prices at Henry Hub have fallen below $8.00 per MMBtu through early September as rapidly filling storage inventories have weighed heavily on the market.
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