Oil leaps above $70 on Katrina
(Reuters)
Updated: 2005-08-29 21:57

Oil prices surged to a record above $70 a barrel on Monday as one of the biggest hurricanes in U.S. history disrupted oil and gas production in Gulf of Mexico.

U.S. oil prices surged to a record above $70 a barrel on August 29, 2005 as one of the country's biggest storms tore through the U.S. Gulf of Mexico, forcing oil producers and refiners to shut down operations. National Oceanic and Atmospheric Administration satellite image of Hurricane Katrina in the Gulf of Mexico on Sunday. [Reuters]

U.S. crude oil futures jumped nearly $5 a barrel in opening trade to touch a peak of $70.80 a barrel, the highest front month price since the New York Mercantile Exchange (NYMEX) began trading contracts in 1983.

It later traded up $3.14 a barrel, or 4.75 percent, at $69.27, trimming early gains after Hurricane Katrina was downgraded to a still-powerful Category 4 storm on the five-step Saffir-Simpson scale.

Despite easing, Katrina threatens lasting damage to vital U.S. oil and refining assets, further straining an industry that has struggled to keep up with two years of rapidly rising oil demand.

"We can expect two months of lost production, and coming in the peak-demand period this is the worst possible news," said David Thurtell, strategist at the Commonwealth Bank of Australia.

More than 40 percent of all U.S. crude oil production in the Gulf of Mexico was reported closed down due to the hurricane, with the total expected to rise significantly as more operators report affected production to the U.S. government on Monday. (Please click on for more details.)

The full extent of the damage and how long it will affect supplies will only be known after the storm clears.

"We're just going to have to wait and see what's left," said Chevron Corp. spokesman Matt Carmichael.

Last year Hurricane Ivan tore up platforms and pipelines in the Gulf, disrupting output for months.

The Gulf of Mexico normally pumps about 1.5 million barrels per day (bpd) of U.S. crude, a quarter of domestic output and equivalent to nearly 2 percent of global oil production.

"The only way we can avoid yet higher prices is if President Bush releases supply from the Strategic Petroleum Reserve," Thurtell said

The administration has said in the past it would release oil from the 700-million-barrel SPR only during a serious supply disruption, but has never given further details.

"The Energy Department (DOE) is monitoring the situation," an administration official said in Washington. The DOE loaned out 5.4 million barrels last year after Ivan, which shut in a total 45 million barrels before full output was restored.

REFINERS HIT

Oil product prices also shot higher to records as the storm forced eight refineries in southeast Louisiana to shut. The refineries account for about 9 percent of total U.S. refining capacity.

Gasoline soared as high as $2.1575 a gallon and heating oil rocketing past $2.00 a gallon for the first time. Natural gas prices were also up 20 percent.

Dealers fear the storm will tighten fuel supplies, which are much lower than relatively robust crude stockpiles and more difficult to replace as most refiners have been pumping flat out to meet rising demand.

Three of the shut refineries appeared to be directly in the path of the eye of the storm.

"We're all wondering, 'What am I going to have to come home to?"' said Barb Hestermann, spokeswoman for the Louisiana Offshore Oil Port (LOOP), which shut down at the weekend, halting 1 million-bpd of crude imports, a tenth of the nation's total.

OPEC PROPOSAL

OPEC's President Sheik Ahmad al-Fahd al-Sabah said that he would propose the group raise both real oil output and its output target by 500,000 bpd at its meeting in September in an attempt to lower prices.

He said most of the extra oil would come from Saudi Arabia, the only OPEC member with sizeable spare capacity.

OPEC had around one million bpd of spare capacity, he said. OPEC is already producing at its highest levels for nearly 26 years.

Any further rise in output would eat into OPEC's capacity cushion to deal with any unexpected global supply outages.