In a relatively slow oil market, a turmoil has emerged with shutdowns in the Gulf of Mexico, as Hurricane Isaac nears the region. The tropical storm Isaac has gone from a Tropical cyclone to a full-scale hurricane, making impact with Florida, and is expected to make landfall along the Gulf Coast by early morning on August 29.

The figure below shows the storm path of Hurricane Isaac forecasted by the Energy Information Administration (EIA) on August 27.

Hurricane Isaac is expected to have a special impact on the oil prices, as the hurricane heads towards the Gulf coast, which represents 44.3% of total U.S. Operable Refining Capacity in January 2012 (Total U.S. Gulf Coast Capacity: 7,671,585 barrels per day; Total U.S. Capacity: 17,322,178 barrels per day).

Source: U.S. Energy Information Administration (EIA), 27 August 2012

According to Bureau of Safety and Environmental Enforcement (BSEE) report on August 27, offshore oil and gas operators in the Gulf of Mexico are evacuating platforms and rigs in the path of Tropical Storm Isaac.

‘Based on data from offshore operator reports, personnel have been evacuated from a total of 346 production platforms, equivalent to 58.05% of the 596 manned platforms in the Gulf of Mexico. Personnel have been evacuated from 41 rigs, equivalent to 53.9% of the 76 rigs currently operating in the Gulf,’ reported BSEE.

Source: Bureau of Safety and Environmental Enforcement (BSEE), 27 August, 2012

As part of the evacuation process, personnel activate the applicable shut-down procedure, which involves closing the sub-surface safety valves, located below the surface of the ocean floor to prevent the release of oil or gas. ‘It is estimated that approximately 78.02% of the current daily oil production in the Gulf of Mexico has been shut-down. It is also estimated that approximately 48.13% of the current daily natural gas production in the Gulf of Mexico has been shut-down,’ said BSEE.

According to U.S. Department of Energy Office of Electricity Delivery & Energy Reliability, as of 2:00 pm EDT August 27th, the center of Tropical Storm Isaac was 280 miles southeast of the mouth of the Mississippi River. The impact on petroleum and natural gas production at that time was as shown in the table on the right.

The impact of tropical hurricanes on production of oil and gas was evaluated at the beginning of the hurricane season, and National Oceanic and Atmospheric Administration’s (NOAA) estimated that median outcomes for shut in production in the Federally administered Gulf of Mexico, as a result of disruptions during the 2012 hurricane season are 4.5 million barrels (bbls) of crude oil and 9.5 billion cubic feet (Bcf) of natural gas. The current status of shut-ins has not been more than was forecasted, but if it crosses that limit, it could mean unexpected price changes for market participants.

Source: ICE, 28 August 2012

Crude oil prices started declining last Thursday as shutdown of production meant a decline in refinery demand. ICE West Texas Intermediate (WTI) Crude Futures of October 2012 dipped after touching a high of 97.26 on August 22 (The figure on the right displays 3-month WTI Crude Futures prices for Oct ’12 contract). It closed at 95.47 on August 27, and is expected to continue its decline until the storm clears out. Brent Crude is being pulled down alongside WTI, as energy market prospects are unclear.

As the market began to pay attention to the hurricane threats, market prices began to climb back up today. Many investors are under the false assumption that the same market trend will follow, as did with Hurricane Katrina. However, it is largely believed that there could be a short-term spike in oil and gas, but then prices would encounter a huge drop back, if the damages aren’t substantial. There is no massive damage to energy infrastructure expected (as happened with Hurricane Katrina in 2005), and production can resume once the hurricane talk calms down.

For now all eyes are on New Orleans and the Gulf of Mexico refineries.