Here comes Gustav!
I'm back from a short vacation and first off I have to apologise to some out there who use the blog as a source for my releases on the iminent movement in pricing here in Newfoundland and Labrador. It's been ten years now since I started my predictions on the movement at the pumps or at the heating oil truck, but only the first time I took a vavcation that affected any release I normally would have done.
I will be back with new numbers in the coming weeks so keep an eye. I have not simply just "gone away".
But, then again, pricing issues never will either and, hence the topic for this entry. I've told you about "Hurricane Syndrome" and we have our first test case on the block...
If I were a smart consumer and betting on the markets, I think I would be filing my tank just about now-and again by Sunday.
Hurricane Gustav has been projected to hit the U.S Gulf Coast as early as this weekend and that means that, in the area there is another possibility that there will be refining disruptions as well as potential damage to other oil infrastructure in the Gulf of Mexico.
Ironic as it is, it was on the Labor Day weekend that also saw the advent of two other hurricanes that disrupted almost 20 per cent of overall US refining capacity. At that time here in Newfoundland and Labrador, consumers saw a spike of $1.48.1 a litre at the pumps...
If Gustaf hits the main concentration of oil infrastructure on the weekend it may very well pale in comparison the potential record we could see at the pumps. It may very well be that, if there is major disruption in production or supply, we could see an added 30 cents a litre at the pumps. The only condition that may help us avoid the hit is "what category hurricane will we be dealing with?"
Why do I say 30 cents?
In the week leading up to the Katrina hurricane hit, spot pricing averaged 60 cents a litre. A corresponding increase of 38 cents a litre was realised on the markets but the full impact of any increase back then was absorbed by the Public Utilities Board at the time. It was simply a case of "wait and see' as the news came out. If it was bad on one day, an "allowable" increase in pricing was granted. That scenario can be expected to be repeated again this time around as it did save the consumer some grief-if I can call it that. It saved us from some of the $2.25 a litre prices as they had in some areas of Ontario and $1.89 a litre in Halifax. Our "maximum allowable" turned into the "record" at the time of $1.48.1 a litre that has since fallen. The unknown variable in all this is wind spped. While the NHC currently has a 30% chance of windspeeds over 74 miles per hour, what will the actual category be by the time this one hits Louisiana again?
So, consumer be warned here!
I fully expect the traders to start bargaining in bad faith on the "promise" of a supply disruption-again, and I also expect the panicked analysts on CNN to again help the trader "justify" his numbers as they push for the potential of $6.00 US a gallon gasoline-again. Back at the time of Katrina, a CNN reporter talked about the potential of $5.00 a gallon and helped institute a panic in the central US.
Let's see if they go for a repeat.
Remember where you read it first IF Gustav hits the processing areas as is the promise from the National Hurricane Center and, if it exceeds a category 3 storm, we can expect to see a run in the markets as the sharks have been let loose...
Keep the gas tank full and conserve throughout this one when it hits.
Update #1: Gustav will now hit shore just west of New Orleans. That puts it a little closer to the Louisiana-Texas border where there is a heavy concentration of oil refining facilities. It wasn't so much the winds of the Katrina storm that shut down refineries as much as it was water and flooding. Gustav is forcast to dump as much as 50 centimeters of rain while it is in the area.
Electronic trading on the New York Mercnatile Exchange will begin at 4p.m Newfoundland time, 2:30EST, to allow traders to "cover their short positions" and to allow for same-time trading with traders in Asia. Gasoline retail pricing along the path of the storm has already increased by several cents a US gallon.
The next twenty four hours will tell the tale on where pricing will be headed. I'd rather err on the side of caution on this one.
Update #2: Gustav has come ashore just slighly west of New Orleans as a category 3 storm. That probably means a little good news on the oil markets as hurricane damage may be minimised. All hinges on the re-start of refineries in the area directly after the storm now as some of those same refineries were closed up due to water damage from flooding rather than wind damage. Some 13 refineries and other distribution and import facilities have been affected so far. We'll keep you all updated here but, we just might all dodge a bullet yet. Question now is, if refineries are closed can other refineries around the US pick up production to meet current demand? Back in Katrina's time, refiners operated at 97 per cent capacity while, as of late last week US refiners operated at close to 86 per cent. Can they pick up the load and prevent a spike?
Update #3: According to Bloomberg, approximately 1.5 million barrels of production has been affected but damage to any refineries has been minimised as a result of the storm being downgraded in intensity. Gustav was originally forecast to hit land with a category 4 or 5 punch but weakend to a category 3 before hitting just west of New Orleans. Some sources are now saying that refining and production will be "back to normal within days". Still waiting on some word of any damage. Flooding could still be a problem as Gustav moves overland and close to other refining facilities close to the Texas border.
In the meantime, oil is trading down as a result of the news. If we hear of no damage in the next day or so, we can assume that there will be no need for any increase in pricing! This was a close one!