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Kilduff: Keep a Sharp Eye on Gustav

Hurricane Gustav
CNBC.com
Hurricane Gustav

Energy prices continue to exhibit significant volatility of late.

Last week, crude oil prices rose and fell six dollars on Thursday and Friday, respectively.

Already, this week, crude oil prices have swung four dollars from low to high.

The dominant aspects of the market are a seeming battle between supply threats and the diminished economic outlook.

Over the next several days the track of hurricane Gustav will be closely scrutinized. The weather models that I rely upon are indicating a path that puts the storm into the heart of US oil and gas production region in the Gulf of Mexico and threatens this country’s refining assets situated along the Gulf Coast region. (See map, at top.)

The very warm ocean temperatures will provide tremendous fuel for this storm. I have likened it to an egg hitting a frying pan. If you recall, this is exactly how the devastating storms of 2005 erupted; once Katrina and Rita entered the Gulf of Mexico, satellite imagery showed the storms encompassing almost the entire body of water from Texas to Florida.

I do not mean to sound alarmist, but Gustav is setting up in a similar fashion to those historic storms and represents the most credible storm threat since that time.

Prices will rise and fall on the storm tracking updates. Look for Gulf production to be affected as soon as Wednesday, as offshore rigs are evacuated, out of an abundance of caution. Shell is the first to announce such an evacuation. Also, with a holiday weekend before us, I would expect prices to rise, as traders will likely seek to avoid the risk of being short over the extended weekend.

A witches brew of geopolitical concerns is also helping to keep a floor under prices. While no single situation is a featured item, at the moment, the list of concerns is lengthy and possible of flaring up at any moment: Iran, Pakistan, Nigeria, Russia-Georgia, are all percolating in the background, feeding the anxieties that have served to prop up oil prices over the past year or more.

The major moderating factor on prices continues to be the global economic outlook. With Japan and Europe registering economic contraction and the possibility of the United States joining those ranks, slackened energy demand is a necessary consequence. It was the seeming demand insatiability that was component of the record price run, and that concern appears to have ebbed considerably.

When prices were rising, the silver lining was that they were rising for a good reason: a robust global economy. While consumers welcome the price break at the pump these days, the declines are coming on the back economic slow down, which is the bad news here.

Critical support for crude oil prices is now at $110.89 per barrel. If that level is broken, a considerable sell-off may ensue. However, despite the headwinds from demand concerns, prices appear to have made base or floor and are poised to go higher, particularly with the current set of concerns. It will truly be another stormy week for energy prices.

Farrell: Economic Worries are Trumping Russia Oil Fears

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John Kilduff
John Kilduff

John P. Kilduff Senior Vice President Of Energy at MF Global Ltd. He's also a CNBC contributor.