Rita’s long-term impact on US oil unknown

09/23/2005

Thursday September 22, 10:04 PM EDT

NEW YORK (Reuters) - The worst case scenario for U.S. oil and gas infrastructure after Hurricane Rita reaches land could have gasoline supplies strained further than they already are and prices reaching record levels, some analysts said on Thursday.

Other analysts say prices have the “Rita effect” built in and that once the storm clears land, refineries will come back, imports will start to arrive and prices will decline.

But until Hurricane Rita reaches land, the impact it has on U.S. Gulf Coast energy infrastructure and on the price of gasoline and heating oil remains a wildcard.

Hurricane Rita, now downgraded to a Category 4 storm, has veered toward the east and now is expected to make landfall early Saturday just north of Houston, Texas, shifting the focus away from refineries in Corpus Christi and toward the Louisiana border.

“It’s still somewhat of a coin toss. The odds lean against the possibility of this coming up the Houston Ship Channel,” said Jim Ritterbusch, president of Ritterbusch and Associates in Illinois.

Oil prices eased on Thursday as the storm weakened slightly and as crude demand dropped as refineries shut and could remain closed at least through next week.

The pull back today is reflecting the likelihood there will definitely be some wind damage, power outages and possibly flooding damage. As analysts continue to monitor Rita’s path, the spectre of Hurricane Katrina remains visible.

“Katrina blew a big hole in the product market. If Rita doubles that, we are in for some serious problems,” said Jamal Qureshi, an oil analyst at Washington-based PFC Energy.

Already tight U.S. refining capacity was strained further after four refineries in Louisiana and Mississippi closed after flood damage from Katrina, sending the average price of a gallon to a record $3.06 a gallon.

“This could be almost worse than Katrina because there are 4 million barrels of refining in Texas areas, much more than there was in New Orleans,” said Tim Evans, analyst at IFR Energy Services in New York. “(Texas) is the other major refining heart,” he said, adding that Rita will be a stress test for Gulf Coast refineries.

Lack of power has kept the Louisiana refineries closed for more than three weeks, so any sustained closure of Texas area refineries will hit supplies of gasoline and heating oil needed for winter fuel.

But some analysts think that Rita won’t have that much of a sustained effect.

“The market has already bid up the price of gasoline. It’s been buy the rumor and sell the fact,” said Sarah Emerson, director of petroleum at Boston-based ESAI Inc.

Emerson expects to see gasoline prices to initially rise and then ease as the higher prices attract shipments of the fuel to U.S. shores and the storm ends.

“Prices will come down on imports. There are lots coming our way,” said Emerson.

As the storm neared, Texas refiners intensified efforts to prepare for the hurricane by shutting down operations, taking down about 29 percent of U.S. total refining capacity.

According to Qureshi, the best case scenario would be 2 million bpd of refining capacity out for four or five days. The worst case, he said, is if a big chunk of refining capacity is out for weeks or months, much like Katrina knocked out four refineries in Louisiana, which are still not back in operation after more than three weeks.

“The market is certainly tightened by this event,” said IFR’s Evans, who said he wouldn’t be surprised to see gasoline stocks fall substantially but with demand limited by a slowdown of gasoline demand which has fallen to 6.5 pct below August levels over the past two weeks.

But some industry observers think that there will be a big difference between Rita and Katrina, which wreaked havoc on Louisiana and Mississippi.

“After Katrina, there were a bunch of refineries which didn’t sustain structural damage but couldn’t turn the power back on,” ESAI’s Emerson said.

While Houston isn’t below sea level like New Orleans, it still can see some damage from flooding.

“Houston isn’t as vulnerable, but there could still be dangerous storm surges,” said Aaron Brady, analyst at Cambridge Energy Research Associates.

But in the end, it will be a wait-and-see because only Mother Nature knows for sure.