Weak US Oil Demand Blunts Storm Outages

Pemex's Infrastructure
(Click to Enlarge)

NEW YORK (Dow Jones Newswires), September 26, 2008

For Mexico's state oil company, Pemex, the good news came when twin severe hurricanes avoided its offshore oil platforms this month.

The bad news came after the storms struck U.S. Gulf Coast refineries, slashing oil demand in its biggest market. Pemex said late Wednesday it has been forced to trim its already struggling oil output by 250,000 barrels a day, or 9%, due to brimming inventories caused by lingering outages at U.S. plants.

The good news-bad news scenario that bedeviled Pemex plays out across the U.S. energy map in the wake of hurricanes Gustav and Ike.

Latest government data show that in the immediate aftermath of Ike, U.S. crude oil output and refinery operations fell to lows beyond the depths plumbed in the wake of hurricanes Katrina and Rita, the sinister sisters that struck three years earlier.

The good news from Energy Information Administration data is that U.S. oil demand is down too, blunting the impact of the reduced flows.

Today's demand weakness, and indications that refineries and platforms didn't suffer severe damage, may prove to be a plus if it puts a cap on oil prices as the Bush administration struggles to contain and conquer the swirling economic crisis.

Nymex crude oil futures for November delivery settled 2.2%, or $2.29, a barrel higher Thursday, at $108.02 a barrel. But despite the upheaval of the hurricanes this month, prices are still down 26% from the record-high settlement of $145.29 a barrel set July 3. So far, front-month Nymex crude is averaging $104.17 a barrel this month and is on target to post the weakest monthly average since February. 

Demand Trend Down  
Back in 2005, the appetite of the world's biggest oil consumer was growing at a 1% rate in the first eight months of year, compared with a year earlier. This year, demand dropped 4.2% through August from the pace of the first eight months of 2007.

In the week ended Sept. 19, total U.S. oil demand slumped 1.4% to 18.784 million barrels a day, the lowest since March 8, 2002, EIA data show.

And since Hurricane Gustav hit on Sept. 1, demand is averaging just over 19.1 million barrels a day, off nearly 1.3 million barrels a day from a year ago and 1.15 million barrels a day weaker than in August.

Current demand is on pace to be the lowest in any month since December 2001. Back then, the collapse of Enron was the major financial crisis and OPEC was enlisting non-OPEC support in output cuts to boost prices. OPEC's move worked, as prices recovered from a 30-month low of near $19 a barrel and never traded lower again.

Some analysts said the demand figures are being skewed by the disruptions at refineries, storage terminals and pipelines, noting that EIA uses movements of supplies out of primary storage facilities as its proxy for demand.

But MasterCard's SpendingPulse report, which tracks gasoline sales, said demand in the week ended Sept. 19 plunged 5.7% week to week and was 7.6% below a year ago, at the lowest level since mid-April 2007.

While the scope of true demand trends are a constant market riddle, there are clear signs of gains on the supply side.

When EIA's latest data snapshot was taken, 93% of U.S. Gulf Coast oil output, or 1.2 million barrels, was shut in, and 12 refiners accounting for 3 million barrels a day, or 40% of Gulf Coast capacity, were offline.

The Energy Department said Thursday that about 800,000 barrels a day, or 62.5% of Gulf Coast output, remains offline, and just four refineries, accounting for less than 950,000 barrels a day, or 12% of regional capacity, still are closed.
Pump Prices Primed to Fall
Mexico, the third-biggest oil supplier to the U.S., said it expects to lift the output restrictions by the end of the week. The cutback was equal to nearly 18% of daily exports in August, when struggling output hit a 13-year low of 2.76 million barrels a day.

EIA warned that tight gasoline inventories, which fell to the lowest level since August 1967, mean that spot fuel shortages may linger in some regions for several weeks.

But, as imports rise and refineries ramp up operations, retail regular gasoline prices could fall from $3.718 a gallon this week to $3.50 or below by year end. Prices hadn't been that low since mid-April.

Expectations of continued weak demand for gasoline are key to the projected downturn in prices, which popped above $4 a gallon in several states after the storm, EIA said.

Still, in the good news-bad news culture of the current market, even the expected drop would leave pump prices more than 50 cents above year-ago levels. But that's an improvement from the current 90 cents a gallon year-to-year premium.

Copyright (c) 2008 Dow Jones & Company, Inc.

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