Released on September 4, 2008
(Next Release on September 10, 2008)

Hurricane Gustav Hits Gulf Coast with Softer Glove than Katrina/Rita
Early indications point to the petroleum supply system fairing much better after Hurricane Gustav than after the Katrina/Rita Hurricanes in 2005. However, damage assessments are not complete, power must be restored, and restarting the petroleum system takes some time. Also, it should be noted that data contained in This Week in Petroleum is for the week ending August 29, and may not fully reflect the impact of Hurricane Gustav. More up-to-date information on Hurricane Gustav’s impact on U.S. oil infrastructure is being posted in the Department of Energy Situation Report and the EIA Report on Hurricane Impacts on U.S. Energy.

In preparation for the hurricane, oil rigs in the Gulf of Mexico and many refineries in the Gulf Coast region were shut down. In addition, the Environmental Protection Agency (EPA) issued several fuel waivers to help prevent serious gasoline shortages during the evacuation and emergency preparations. With no production from the Gulf, no imports from closed terminals, and no products from shut-down refineries, several crude oil and product pipelines also were shut down or run at reduced rates through the storm and will only ramp up as supply comes back.

At the peak of Gustav preparations, shut-in Gulf of Mexico crude production totaled 1.3 million barrels per day – approximately 100 percent of the U.S. Gulf crude production. Fourteen refineries were shut down, corresponding to 2.7 million barrels per day of capacity [32 percent of Petroleum Administration for Defense District (PADD) 3 capacity and 15 percent of total U.S. capacity], while another ten refineries reduced their crude oil throughput. Even with no damage, and power fully restored, it takes time to bring a refinery back up – more than a week in many cases. As offshore production, refineries, and pipelines return to operation, the web links above will provide current operating status. As of Thursday morning (September 4), shut-in Gulf of Mexico crude production totaled 1.25 million barrels per day while 13 refineries remain shut down and 3 reduced-run refineries returned to normal operations.

Hurricane fears seemed to have contributed to a $3 to $5 run up-in crude oil prices in the last two weeks of August. While memories of damage from Katrina and Rita helped to fuel the increase, softening world demand and additional global refining capacity likely helped to dampen the run-up. Oil prices began to ease with the International Energy Agency (IEA) announcement of the potential availability of strategic releases, and dropped even further with the apparent relatively benign outcome of the storm on petroleum infrastructure. Earlier this week, the Department of Energy (DOE) announced that it would grant a request made by Citgo to pull 250,000 barrels from the U.S. Strategic Petroleum Reserves (SPR) for Citgo’s Lake Charles, LA refinery, which was impacted by the closure of the Calcasieu Ship Channel. However, yesterday, Citgo rescinded its request after the Calcasieu Ship Channel was reopened. At the same time, DOE announced that Marathon Petroleum Company had also made a formal request for oil from the SPR for its Robinson, IL and Catlettsburg, KY refineries, which have been affected by the lack of crude oil supply coming out of the Gulf of Mexico. As of September 3, the Department of Energy was reviewing Marathon’s request. In accordance with historical practice, any crude oil taken from the SPR will be repaid by that company, with interest, by adding oil back into the SPR at a later date.

Despite the temporary loss of crude oil production and refinery outages, futures prices on the New York Mercantile Exchange (NYMEX) continued to drop, closing on Wednesday, September 3, $6.11 below the $115.46 level seen on Friday, August 29. Gasoline (RBOB) and heating oil for October delivery also were down about 9 and 11 cents per gallon, respectively, at the close of trading on Wednesday compared to last Friday. As long as companies report no long-term damage, oil prices are not likely to spike significantly higher due to the effects of Hurricane Gustav, and may even continue the downward trend that began in mid-July as a result of perceived softening in world crude oil market fundamentals. Product prices, on the other hand, could see some temporary local increases until the refining and delivery systems are fully operational.

Average Gasoline and Diesel Prices Continue Downward Slide
The U.S. average retail price for regular gasoline fell for the eighth week in a row, with a decrease of 0.5 cent to 368 cents per gallon. The five-week downward trend in prices across every major region of the country came to an end with an increase this week in the Gulf Coast. The price on the East Coast fell by 0.3 cent to 363.1 cents per gallon. The prices within the East Coast region were mixed as prices went down 1.9 cents in New England and 3.1 cents in the Central Atlantic, but increased in the Lower Atlantic by 2.4 cents. The average price in the Midwest slid for the seventh week in a row, falling 1.4 cents to 367.3 cents per gallon. The price in the Gulf Coast showed the most dramatic change, rising 5.9 cents to 357.8 cents per gallon, reversing a six-week plunge that had shaved 45.2 cents off the price per gallon since July 14. Even with the increase, the Gulf Coast continues to have the lowest average price of any region. The price in the Rocky Mountain region continued its downward slide for the sixth consecutive week, falling an additional 2.1 cents to 381.3 cents per gallon. The West Coast price fell for the tenth week in a row, dropping another 4.7 cents to 385.9 cents per gallon. That price has plummeted 60.1 cents since its all-time high set on June 23 but is still the highest average regional price in the Nation. The California price fell a nickel to 390.5 cents per gallon.

The average U.S. retail diesel price dropped another 2.4 cents to 412.1 cents per gallon, reaching its lowest point since April 14. In each of the past seven weeks, diesel prices have fallen in every region of the Nation, with the U.S. average plunging 64.3 cents from its all-time high. Even with this continuing drop, the U.S. average price remained 122.8 cents per gallon higher than it was a year ago. The average price on the East Coast slid another 3.0 cents to 416.9 cents per gallon. The price in the Midwest remained the lowest at 406.6 cents per gallon, reflecting a drop of only 0.7 cent. The average price in the Gulf Coast fell 3.0 cents to 406.8 cents per gallon. The price in the Rocky Mountains again fell more than in any other region, dropping 4.3 cents to 418.4 cents per gallon. The West Coast price fell another 3.8 cents to 424.8 cents per gallon with California prices sliding 7.7 cents to 428.2 cents per gallon.

Propane Inventories Post Above Average August Gain
Propane stockholders boosted inventories higher by 5.7 million barrels during August, a level slightly above the most recent 5-year average of nearly 5.3 million barrels. However, during the last week of August, propane stockholders added a relatively modest 0.9 million barrels to primary supplies. These stock gains were achieved just prior to Hurricane Gustav hitting the Gulf Coast. Although Gustav did not cause the same catastrophic damage to petroleum infrastructure as did Hurricanes Katrina/Rita, the lingering effects of restarting refineries, gas processing plants’ and pipelines may limit the growth in propane inventories over the next few weeks.

Strong imports contributed to boost inventories higher last week with East Coast inventories up by 0.4 million barrels, followed by a gain of 0.2 million barrels in the Gulf Coast. Midwest inventories rose by a modest 0.1 million barrels while the combined Rocky Mountain/West Coast region moved up by a similar 0.1 million barrels during this same time. Propylene non-fuel use inventories remained relatively unchanged last week, maintaining the same 6.1 percent share to total propane/propylene inventories as reported in the prior week.

Text from the previous editions of “This Week In Petroleum” is now accessible through a link at the top right-hand corner of this page.