While Hurricane Ike was no Katrina, it’s effects on Gulf of Mexico oil production hold strong three and a half days after landfall. The Mineral Management Services report that less than 3% of oil production has resumed in the Gulf as of 11:30am CST today. This means that Hurricanes Gustav and Ike have exceeded EIA projections of 14.5 million barrels in Hurricane-induced outages throughout 2008, with the possibility of another storm hitting the region before the season is over. An oil market report will come out tomorrow to share how inventories shifted during the period of Gustav recovery and Ike preparation. The more threatening numbers showing potential gasoline shortages probably won’t come out until the following Wednesday, but it will be interesting to see what occurred during the interim period.
With AIG and WaMu woes, the US (and rest of the OECD) economy is so fragile that oil fell toward $90 per barrel — especially after the Fed decided to keep interest rates at 2%, which maintains bearish pressure from dollar strength. Further falls in price may test producers ability to generate profits from new production — as many of them, like some oil sands projects, have overall marginal costs approaching $75 per barrel. The volatility in oil markets may put the brakes on new production capacity worldwide, thus exacerbating this volatility further by triggering another run-up in prices once demand picks up again. These moments are when we can appreciate OPEC as a potential reducer of volatility by lowering their production some to help the oil market stay in balance and prevent firms from losing money by selling their more expensive newer oil at a lower level than their costs. Oil prices remain more than 25% above last year’s average level, but the huge drop in price over the last two months has been remarkable.
I will give details from the oil inventory report, as it sheds light on the prospect for worse shortages in the remote corners of America (including parts of my home state of North Carolina).