Hurricane Isaac Pushes Oil Prices Up

As Isaac nears the U.S. Gulf Coast on the eve of Hurricane Katrina’s seventh anniversary, oil production and refineries are shutting down.

Residents of New Orleans are battening down the hatches as the storm, which strengthened this afternoon from a tropical storm to a Category 1 hurricane, heads straight for the city.

Following hurricane Katrina in 2005, levees around the coast were strengthened and fortifications were improved. The Army Corps of Engineers spent almost $14 billion on these improvements.

And Mayor Mitch Landrieu has not called for evacuation of the city; he’s told residents to take the necessary precautions in preparing their homes instead.

After all, Katrina touched down as a Category 3 storm. Isaac is only Category 1.

But a Category 1 storm could still have winds between 74 mph and 95 mph. And if it hits at high tide, the coast along Louisiana and Mississippi could experience surges over 11 feet.

Which is why companies like Exxon Mobil Corp. (NYSE: XOM), Valero Energy Corp. (NYSE: VLO), and Phillips 66 (NYSE: PSX) are suspending production, temporarily closing plants.

Of the twelve Gulf Coast refineries, six have stopped production and three are running at reduced capacity. 346 offshore oil and gas platforms have been evacuated, taking offline 1 million barrels per day of oil, or 17% of the nation’s daily oil production and 6% of consumption. 2 billion cubic feet of natural gas have also been halted, accounting for 3% of production and consumption.

Gasoline prices in the U.S. reached an average of $3.776 on Monday according to the EIA, and oil prices also rose on Tuesday afternoon.

Benchmark oil in new York hit $69.16, an increase of 69 cents, as investors speculate what sort of damage the storm will do to the refineries and how long they will be down. Some believe they could be back up in a few hours, but others estimate it will take three days.

What really makes a difference is whether or not the refineries lose power and, if they do, how long that takes to repair.

Earlier this week, however, oil prices had dropped, closing as low as $95.47 on Monday on speculation that the Obama administration would release oil from the Strategic Petroleum Reserve (SPR).

Some expect that with 80% of the Gulf’s oil and gas production shut down, the President will need to take action to avoid a huge rise in prices. Others believe that Isaac is only one of the reasons SPR supplies should be released.

From the Financial Post:

“It’s not clear if Isaac will cause sustained damage to production or refining,” said Bob McNally of Washington-based energy consulting firm Rapidan Group.

However, McNally said that Isaac-related disruptions could strengthen the Obama administration’s resolve to release supplies from the SPR. The White House has been considering a release amid high U.S. fuel prices and disruptions in global crude supply from sanctions-hit Iran.

“I think they will use the SPR unless crude sells off sharply, and will blame it partly on Iran,” he said.

The administration had mentioned they were considering necessary moves recently, in response to dwindling petroleum supplies, and indicated an SPR release was possible.

Should this release occur, oil prices would fall to counteract Tuesday’s increase, an increase that could likely continue as Hurricane Isaac hits the coast.

That’s all for now,

Brianna Panzica

@brianna_panzica on Twitter

Energy & Capital’s modern energy guru, Brianna digs deep into the industry with accurate and insightful updates into the biggest energy companies and events. She stays up to date with the latest market moves and industry finds, bringing readers a unique view of current energy trends.