Oil Market Assessment - September 12, 2001

 Based on Energy Information Administration (EIA) contacts and trade press reports, overall U.S. and global oil supplies appear to have been minimally impacted by yesterday's terrorist attacks on the World Trade Center and the Pentagon.  Rumors of scattered closures of U.S. refineries, pipelines, and terminals were reported, and Louisiana Offshore Oil Port operations were partially suspended. While the NYMEX and New York Harbor were temporarily closed, operations are expected to resume soon. Most, if not all petroleum industry infrastructure is expected to resume normal operations today or in the very near term.  Prices at all levels (where markets were open) posted increases yesterday, but many prices fell today, as initial reactions subside.

This event occurred against a background of already tight crude oil and product markets in the U.S. and worldwide.  Even prior to yesterday's events, global oil markets were expected to continue tightening through December, with WTI rising to the $28 to $29 level as the supply surplus from earlier this year continues to erode.  Stocks were seen as drawing but remaining high enough relative to last year that crude prices were likely to remain several dollars lower than the very high prices seen a year ago.  This, of course, assumes normal weather, a sluggish economy, no Iraqi outages, rising non-compliance by OPEC 10, and no unusual logistical or refinery problems.

Any event (such as continued draws, outages, weather, or Mideast tensions) could act as a catalyst to alert markets to the potential for very tight supplies this winter, and oil prices could swing upward.   While yesterday's events could serve as such a catalyst, OPEC has assured us that oil supplies will be maintained. Resuming full U.S. downstream operations should also help to calm any initial wholesale and retail "kneejerk" reactions.

U.S. supply and demand fundamentals feature relatively low inventories for crude oil and petroleum products, and moderate concern over potentially tight supply/demand conditions during the coming winter.  As of the week ending September 7, EIA data show domestic crude oil inventories 6% higher than a year ago, but below the seasonal average for recent years.  Distillate inventories stand 9% above year-ago, and gasoline stocks nearly identical to last year, but both are near the low end of their seasonal average range.  Relative inventory levels vary by product and region, with crude oil and distillate stocks in the Midwest (PADD 2) one of the areas of most concern.  Refinery utilization is reported at 95% of operable capacity.

There have been scattered reports of sharply increasing prices at both wholesale and retail levels for gasoline and diesel fuel.  At present, these appear to be relatively isolated panic reactions due to buying and/or retailers  fears of product outages, and are expected to subside once it becomes clear that product flows will remain uninterrupted.

While the bulk of energy trading operations are located outside of New York (primarily around Houston), a number of large energy traders, are located in or very near the World Trade Center.  Most Houston-based operations and their off-exchange trading systems are in operation today.  Additionally, the International Petroleum Exchanges (IPE) contract will serve as the worlds benchmark, until the NYMEX is operating again.  Access to these important off-exchange markets and the IPE provide a critical outlet for spot purchase and risk management transactions.