Commodities Quiet as All Eyes on GOM Shipping in Horizon Aftermath

In trading today, NYMEX crude oil futures edged up slightly, rising $0.04 to settle at $86.19 after having picked up nearly a dollar on Friday.  Natural gas prices fared better than crude, with NYMEX Henry Hub futures settling up $0.08 at $4/mcf.  The relatively flat trading session for near term futures prices indicates that the market has largely priced in the short term impacts of the Macondo oil spill, while more volatility in the longer term contracts points to concern over the as yet unclear consequences of the incident.

Overall, the impact of the Deepwater Horizon tragedy on commodity markets still remains to be fully realized.  As the scope of the oil spill became clearer last week, commodity traders became concerned about the potential for large scale shut-ins across portions of the GOM, which accounts for nearly one-third of US crude production, as the oil slick could have spread through some of the Gulf's most actively producing areas.  Thus far, only a handful of natural gas production platforms have been shut in and no crude oil production has been impacted.

For commodity prices, the most critical area to watch in the coming weeks is what happens with the Gulf Coast shipping channels, as the region's refineries account for nearly one half of domestic production of refined products. All companies and regional port authorities with refining capacity say crude supplies are safe at this time.  But the slick is the size of Puerto Rico, so all eyes are on the shipping channels as the market will begin to price it into crude upon word of any closures.

In the worst case scenario with a shutdown of the Louisiana Port and the Southwest Pass, the aftermath of the Deepwater Horizon incident could lead to major impact on the price of everything from steel to coffee.  "But we're not there yet," said Phil Flynn, senior market analyst at PFG Best. "And as far as oil prices, as bullish as it looks in the short run, there's not much of an impact."

The contango has been really strong, Flynn said, and it showed strong growth again Monday.  As such, the market seems to be focusing on the long term impact, which would come as a result of potential curtailment of offshore drilling, not to mention inflation, he said.

With the pending lift of federal offshore drilling moratoria, any regulatory changes stemming from the incident remain to be seen. New regulations for drillers and service companies generally support healthier crude prices – though that is reflected in the price at the pump as well, as Flynn noted. And some analysts perceive new regulation as inevitable, which in turn will increase costs in the E&P sector.

Outside of the commodities market, the Gulf's huge seafood industry, second only to Alaska's, is imperiled.  BP CEO Tony Hayward met Monday with U.S. DOI and DHS officials to discuss damage control. BP and partners are paying about $6 million per day in cleanup efforts, and those costs will likely spike when the slick makes landfall.