New Orleans: The Big Disconnect Oil: U.S. to Tap Strategic Oil Reserves

New Orleans Aftermath Katrina
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Gasoline prices are at the forefront of the worry list, as will be damage reports from the Gulf. Economic data could have an effect, but, with the damage to New Orleans, the old news may not have as much effect, unless it is dramatic, as the markets start factoring in the potential damage to the economy.

Today's Analysis: New Orleans: The Big Disconnect

The hurricane Katrina disaster is so overwhelming that it looks as if the whole world has been left speechless.

After 9/11, it was easy to surmise what was going to happen. The Federal Reserve was going to ease massively, and the U.S. would find a military target with which to retaliate for the attacks. But, in the case of New Orleans, Biloxi, and the rest of the shattered Gulf Coast, the solutions, may not be so easily discernable, which sets up the possibility of a drawn out response, and puts the markets in a position of having to wait before making a decision.

The current lack of a major response from the markets, in our opinion, suggests that when the markets fully react, the action could be more negative, and the effects more damaging than anyone seems to be forecasting.

The damage to New Orleans, the largest U.S. port may be irreparable, and there is the possibility that the city itself may be lost. 95% of the U.S. energy production in the Gulf of Mexico is off line, and that means that 25% of the U.S. energy supply is unavailable. Much of the oil infrastructure on land, especially key pipelines seems to have survived. The problem seems to be in getting the oil from the Gulf into the pipeline systems, and then in getting the damaged refineries, at least 8 or 9 of them according to wire services and other sources, back online. The situation could take several days to several months to fully sort out and quantify.

The repercussions of this disaster, are extremely significant, and wide ranging. According to,

  1. "The Midwest grain market, which will be nearing peak harvest season in just a few weeks, needs the Mississippi to be reopened as soon as possible to reach export markets."
  2. "According to the U.S. Coast Guard, the lower Mississippi from Baton Rouge to the Gulf of Mexico remained shut to all vessels Tuesday, with no estimate on how long it might take to clear the river. "
  3. "Shipping sources said most navigation aids along the Mississippi were missing or damaged and the Army Corps of Engineers, entrusted to keep the inland waterways open to ship traffic, have not yet been able to survey the channels."
  4. " If heavy silting from the muddy floodwaters has clogged the channels, dredging operations could take weeks, hampering imports and exports of key cargoes -- not only for fuel, but also coffee, grain, rubber and steel."

According to, citing shipping sources, the Mississippi river is closed to navigation and it could be a month before any significant shipping can start to flow through the river, which means that grain shipments are extremely in doubt, as agricultural producers will not likely " be able to ship grain into the region by the end of September. Soybean harvest begins in two weeks, and national soybean storage facilities already are filled to capacity."

And from a public health standpoint, the potential for major outbreaks of infectious disease in the area are astronomical.

Market Reaction

The markets, in our opinion, have yet to fully react to this situation, and much of the reason for the lack of major market drama, is the lack of reaction from the Federal Reserve. The economic data from all of this, is likely to be very negative, but could take several weeks before it works itself into the data stream.

Oil and gasoline prices have reacted more than just about anything else, and they reacted in predictable fashion, by rising to new records, and staying there, at least overnight. Soybean and corn prices barely moved on 8-30, although that may change.

Bond yields fell, and the dollar remained stable, while stocks drifted lower.


This is as surreal a scene as we have ever seen. An entire U.S. city has been wiped out, and is in danger of being abandoned, while other major areas of the Gulf Coast have been severely damaged. The most strategic city in the area, New Orleans, the most important port in the country, with regards to energy may not be salvageable, or may take several weeks to months before it comes back to full operation.

Global reaction to the disaster is mum. The Federal Reserve has yet to comment on whether this will have any effect on its continued quest toward higher interest rates. And the financial markets, other than energy and bonds, have yet to fully react.

If and when the markets, the Fed, and the general public wake up to what's really happened here, all kinds of extreme reactions are possible.

Oil Market Summary And Outlook: Delayed Reaction Catches Up With News

As we went to press, the White House announced it will tap the Strategic Petroleum Reserve. Oil prices eased slightly below $70, immediately after the announcement. This will be a very interesting day.

The oil market finally caught up to events, as prices for crude remained above $70 overnight, after it became clear that there is significant damage to the oil infrastructure in the Gulf of Mexico after hurricane Katrina.

Oil stocks were mixed on 8-30, but the tone was definitely to the up side, suggesting that the markets could be setting up for another move up.

Supply data will be important as it will give the markets an idea as to where things were before the disaster. If there was a significant drawdown in supplies, before the storm hit, it could send prices significantly higher. The key market at this point is gasoline, where Unleaded Gas Futures were trading above $2.50 overnight. That could easily translate into regular gasoline at the pump over $3.50, with premium being significantly higher. The market will also start to figure in heating oil costs, as the weather eventually turns over.

From a trading standpoint, this market is now both a technical affair, and a news driven market, with the action in the Gulf the key to developments. Active traders should stick with exchange traded funds, such as the Oil Service HOLDRS trust which offer a good way to participate in the overall trend, but still offering liquidity and allowing for the consolidation of the trade into one position that can be liquidated and sold short when the market turns.

Our very long-term opinion on oil has not changed. We are still in a very long-term bull market in oil, until proven otherwise. The long-term line in the sand, for us, remains $40 per barrel. That means that prices can correct to $40 and we could still be in a long term, secular bull market. If prices were to fall below $40, then the very long-term trend will have likely reversed.

The Philadelphia Oil Service Index (OSX) is still struggling near the 160 area.

The Amex Oil Index (XOI) moved higher. The 1000 area is key resistance.

In the Rigzone Store:

Successful Energy Sector Investing: Every Investor's Complete Guide

Dr. Duarte's book predicted many of the current developments in the economy and the energy markets, and provides an excellent set of benchmarks and trading lessons for what could be in store for the future.


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