Gustav: Bull Or Bear?

"US Oil Interests Survive Gustav, Better Than Expected". I can see the headlines now. Living in "1984" everything "bad" is "better than expected" which equals "good". Only in America... A Cat 3 hurricane hitting the Gulf Coast is certainly no laughing matter, but the way energy traders and the financial media have dismissed this threat to the nations energy infrastructure has been truly laughable. Yes, Katrina was a Cat 5 storm "prior" to making landfall in New Orleans as a Cat 3 storm, and this may be giving energy traders some comfort, but no two hurricanes are the same. Just because a hurricane is "not gaining strength" does not necessarily make it less destructive.

Uncertainty appears to have "frozen" the energy markets as they wait to see what destruction, if any, results from Gustav's passing, rather than "speculating" on the outcome. Remember too, "speculation" is sorely frowned upon now by the SEC...unless of course that speculation is too the short side in the Precious Metals. If anything, a weaker Euro today resulting in a stronger Dollar has more to do with Oil's lack of response to Gustav's threat. And this observation goes a long ways towards proving that computer trading controls today's currency and commodities markets more than humans and fundamentals do.

As Gustav makes landfall West of New Orleans this morning, let's look at the "potential" for energy infrastructure destruction that the energy traders and financial media may be ignoring.

Ground Zero appears to be Port Fourchon, Louisiana. Never heard of it? Neither had I, but Google changed that in a hurry. Port Fourchon may be the most vital piece of energy infrastructure in the United States.

Port Fourchon is a small community on the southern tip of Lafourche Parish, Louisiana, on the Gulf of Mexico. It is a sea port, with significant petroleum industry traffic from off shore Gulf oil platforms and drilling rigs as well as the Louisiana Offshore Oil Port pipeline coming through it. There are over 600 oil platforms within a 40-mile radius of Port Fourchon. This area makes up 16 to 18 percent of the US oil supply.
http://en.wikipedia.org/wiki/Port_Fourchon,_Louisiana

Forecasts Put Louisiana Offshore Oil Port In Gustav's Eye
NEW ORLEANS -(Dow Jones)- The National Hurricane Center said early Sunday that Hurricane Gustav is expected to make landfall Monday afternoon near the Louisiana Offshore Oil Port.

The NHC said Gustav was expected to make landfall at about 1 p.m. CDT Monday at Timbalier Bay, only a few miles west of LOOP.

Severe damage to LOOP, which handles 10% of oil imports and is the only U.S. facility capable of offloading the largest tankers, would disrupt world oil shipping lanes. Such a disruption would force producers and refiners to scramble to find new ways to import oil from sources as diverse as Saudi Arabia and Venezuela. One tanker broker called a direct hit on LOOP "the only way that Gustav could have impact on the tanker market."

Refiners in Louisiana rely heavily on LOOP, while the port also sends some oil to the Chicago area along the Capline pipeline. Most Louisiana refineries have shut down ahead of Gustav, and could be out for weeks if the state's power grid takes a heavy hit from the storm.
http://money.cnn.com/news/newsfeeds/articles/djf500/200808311022DOWJONESDJONLINE000292_FORTUNE5.htm

The Louisiana Offshore Oil Port (LOOP) is clearly the "hub" of US Oil imports. Disruption or destruction could severely impact energy supplies in the US. Yes, the government has said that the Strategic Petroleum Reserve stands at the ready to make up for lost imports, but if the electric grid in the region is down for a significant time, the refineries will be unable to operate even if they survive Gustav completely intact. Other refiners nationally will be unable to make up for lost refining capacity because most are already running at, or near, capacity. Supply disruption is the biggest factor that drives Oil prices higher. A disruption of supply via the LOOP could have a major impact on the cost of gasoline going forward if nothing else. Remember too that September is when refineries begin to ramp up production of heating Oil for the coming winter. Heating Oil supplies could be a risk in the not too distant future because of this storm. Bottom line: until we know the fate of the LOOP, Oil prices will be frozen with uncertainty.

To read more about the Louisiana Offshore Oil Port follow this link: http://en.wikipedia.org/wiki/Louisiana_Offshore_Oil_Port

Oil market waiting on Gustav
NEW YORK (CNNMoney.com) -- As Hurricane Gustav neared the Gulf coast Monday, oil prices fell after spiking more than $3 on Sunday as the world oil market waited for the potentially devastating storm to come ashore.

"This is a very, very muted response," said Peter Beutel, an oil analyst with Cameron Hanover. "The fact that it's trading this low shows how powerful the dollar is and how bearish this market has become; had this happened in early July, oil would have been up $10 now."

Gustav threatens oil imports and production facilities. The 5.6 million barrels of imported oil that enter the Gulf every day have been suspended, according to the U.S. Department of Energy. Those imports account for 56% of all oil imports, the agency said.

And the Gulf is the site of about 25% of U.S. oil production, or 1.3 million barrels a day. Offshore platforms and pipelines buried in the sea bed are vulnerable to extreme storms such as hurricanes.

As of Sunday evening, 96% of oil production in the Gulf has been halted, according to the Energy Department.

"We're not trading as high as some may have thought partly because the storm has weakened a bit and partly because it looks like [the industry] is prepared for this," said Alaron Trading senior market analyst Phil Flynn.
http://money.cnn.com/2008/09/01/markets/oil_gustav/index.htm

As everyone hopes for the best, Hurricane Gustav is now raking the South Louisiana Coast. Only time will tell if Gustav was an energy bull, or a lumbering bear. Sunrise Tuesday should bring with it a lot of answers for the energy markets.