Barrel of oil tops US$70 as hurricane slams into Gulf Coast

CRUDE oil prices rose to new highs last week as Hurricane Katrina forced the shut down of about half of the Gulf of Mexico’s production capacity and badly disrupted refining.

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By  Stuart Qualtrough Published  September 4, 2005

CRUDE oil prices rose to new highs last week as Hurricane Katrina forced the shut down of about half of the Gulf of Mexico’s production capacity and badly disrupted refining. For a short time, US light crude rose by around US$5 a barrel to US$70.80 as gasoline and heating oil prices also soared when the key production areas were battered by the worst storm to hit the US in decades. Insurers are also bracing themselves to be hit hard as they face picking up the multi-billion dollar repair bill. The storm slammed into the Louisiana coast on Monday morning, killing more than 150 people and cutting power to more than 317,000 homes and businesses in the south of the state. More than a million people had already evacuated the New Orleans area, while a number of Gulf of Mexico platforms and eight refineries were closed. The biggest US oil import terminal was also forced to temporarily stop onshore deliveries to US refineries. At first there were concerns that the storm might not just cause short-term closures of facilities but longer-term damage. At least two oil rigs were set adrift by the fierce winds and one rig in dock at Mobile, Alabama, broke free of its moorings and crashed into a nearby bridge. There were calls for the White House to release stocks from the government’s Strategic Petroleum Reserve as the already over-stretched global production capacity, particularly for oil suitable for US refineries, was adding further pressure on the market. Initially, weather forecasters said the Louisiana and Texas oil platforms in the Gulf of Mexico would be unaffected as the hurricane appeared to be sweeping away harmlessly in a different direction. But in the early hours of Monday morning, the devastating weather system suddenly changed course and headed directly for New Orleans with wind speeds of up to 150mph. At one point, Katrina was described as a Category 5 Hurricane, the highest on the Saffir-Simpson scale of storm strength. Only three Category 5 storms have hit the US, and the authorities have long feared that a direct hit by a big hurricane would demolish New Orleans, which is mostly below sea level. Fortunately by the time it hit landfall, the severity of the storm had been downgraded to a Category 4 and it largely passed to the east of New Orleans. However, it left in its wake a trail of chaos and destruction as boats and helicopters were needed to rescue hundreds of people stranded on the roofs of their homes. Many of the leading oil and gas companies shut down production and withdrew staff from platforms in the hurricane’s new projected path. The oil majors are often forced to take such emergency measures in hurricane season. More unusual, however, was the closure of the onshore pipeline of the Louisiana Offshore Oil Port, the biggest US oil import terminal. The port handles about one million barrels of crude oil a day — 11% of US imports. Analysts estimated roughly 12% of total US crude oil production and 10% of US refining capacity had to be shut down and many feared it would take weeks to determine the exact cost to US production and refining capacity. About 70 companies are expected to report to the Minerals Management Service on the hurricane’s impact on their Gulf production. Royal Dutch/Shell, for example, said it had closed all its daily production in the Gulf of Mexico, equal to about 420,000 barrels of oil and 1.3billion cubic feet of gas, and that two drilling rigs it has under contract are adrift. Last September, Hurricane Ivan caused huge disruption to oil production for several months after pipelines were damaged by mudslides in the Mississippi delta. It also destroyed seven platforms and severely damaged six others but the impact of the pipeline damage was more serious.

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