Oil Surges to Record, Gas Rises as Storm Threatens U.S. Output

Bloomberg
Aug. 24, 2005

Crude oil rose to a record $67.40 a barrel in New York and natural gas reached $10 for the first time in 30 months on concern that a storm heading for Florida may threaten production platforms in the Gulf of Mexico.

Tropical Storm Katrina, the 11th named storm of the year, is forecast to reach hurricane strength before crossing Florida August 26 and moving into the Gulf, the Miami-based National Hurricane Center said. The Gulf of Mexico accounts for 24 percent of U.S. gas production and 30 percent of oil output.

``Katrina is worrisome because of where it's headed,'' said Adam Sieminski, chief energy economist at Deutsche Bank AG in New York. ``If it still has any oomph when it gets to the Gulf, they will start shutting platforms.''

Crude oil for October delivery rose $1.64, or 2.5 percent, to $67.35 a barrel at the 2:30 p.m. close of floor trading on the New York Mercantile Exchange. The previous record of $67.10 was touched on Aug. 12. Prices are up 49 percent from a year ago.

Natural gas for September delivery rose 29.7 cents, or 3.1 percent, to $9.98 per million British thermal units in New York. Futures touched $10.128, the highest since February 2003 when supplies plunged because of cold weather in the Northeast and Midwest U.S. Gas prices have surged since touching $1.83 in September 2001 and are 87 percent higher than a year ago.

Rising Gas Prices

``We've got a tropical storm coming into the Gulf, which has got people worried, but we've been seeing natural gas prices rise over the past six months and actually over the last three or four years,'' said Ben Dell, an exploration and production analyst for Sanford C. Bernstein in New York. ``This is driven by the fact that new supplies of natural gas in the U.S. are becoming harder and harder to come by.''

Hot weather pushed U.S. cooling demand to 14 percent above normal last week, according to the National Oceanic and Atmospheric Administration.

``When crude oil goes higher there's upward pressure on natural gas,'' said Jason Schenker, an economist at Wachovia Corp. in Charlotte. ``We could easily see $11-plus natural gas this winter if the weather is cool and injections don't increase.''

Oil followed natural gas higher because some factories and power plants can switch between petroleum-based fuels and gas depending on cost.

In London, the October Brent crude-oil futures contract rose $1.33, or 2.1 percent, to $65.98 a barrel on the International Petroleum Exchange. Brent touched $66.85 a barrel on Aug. 15, the highest for a contract closest to expiration since trading began in 1988.

Impact on Economies

Surging crude oil has hurt the economies in poor countries that subsidize fuel prices. Indonesia's stocks and bonds fell after the nation's currency plunged to a 3 1/2-year low on speculation rising oil prices will force the government and companies to buy more dollars.

Indonesia is the only member of the Organization of Petroleum Exporting Countries that is a net importer of oil. Reducing those subsidies may trigger unrest in the country, which has had four presidents since former dictator Suharto resigned amid public protests in 1998.

``If governments are no longer able to afford to subsidize fuel prices, demand will be sapped,'' Schenker said. ``Asian demand could fall once consumers feel the high prices.''

U.S. Inventories

Gasoline supplies plunged 3.2 million barrels to 194.9 million barrels last week, the eighth-straight decline, the Energy Department said. Stockpiles are at the lowest since November 2003. A fall of 1.5 million barrels was expected, according to the median of responses in a Bloomberg survey.

U.S. consumption of the fuel jumps between late-May's Memorial Day holiday and the Labor Day holiday in early September, when motorists take to the highways for summer vacations.

Crude-oil supplies jumped 1.9 million barrels, the fourth- straight increase, to 322.9 million in the week ended Aug. 18, according to the report. Stockpiles are more than 10 percent higher than a year ago.

Gasoline for September delivery rose 6.7 cents, or 3.6 percent, to $1.925 a gallon in New York. Futures reached a record $2.029 on Aug. 17. Heating oil for September delivery rose 4.56 cents, or 2.5 percent, to $1.865 a gallon.

``We certainly didn't see higher gas prices coming as quickly as they came and as precipitously as they came,'' William Clay Ford Jr., chief executive of Ford Motor Co., said to reporters in Detroit yesterday.

Gasoline Pump Price

Regular-grade gasoline, averaged nationwide, fell 0.4 cent to $2.611 a gallon yesterday, according to data released today by the AAA, formerly the American Automobile Association. Prices averaged a record $2.614 a gallon on Aug. 19. Pump prices are 39 percent higher than a year ago.

``A barrel of Starbucks latte would cost you $1500, compared to a barrel of crude, even at $66 a barrel,'' Dell said. ``What's interesting about that is not so much that coffee costs more than oil, but the fact that you could drive to Boston and back from New York and if you had three or four people in the car and they decided not to have a coffee it would offset the entire gasoline increase from $2 gasoline to $3 gasoline.''