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Aug.28

7:01 PM ET

Thursday, 28 Aug 2008

Gustav Already Driving Gasoline Higher

Posted By:Patti Domm

Topics:Currencies | Stock Market | Investment Strategy

Sectors:Oil and Gas

Gustav hasn't even made landfall, and it's already hitting consumers in the pocket book.

Gasoline could jump 10 to 15 cents a gallon at the pump over the Labor Day weekend for some drivers, according to Tom Kloza, chief analyst at the Oil Price Information Service. "The wholesale prices are up from Wednesday to Wednesday by about 35 cents," he said.

Some consumers may already see prices going up, particularly in the Gulf states, as supply worries pushed up prices in the spot market. Kloza said the higher prices could also move up into the Ohio Valley as gasoline station owners pass along the increases.

That national average price of gasoline is $3.66 per gallon, off from a record high of $4.114 a gallon reached last month. Gustav could push prices back toward $4 per gallon, even if temporarily.

Gustav, a tropical storm as it passed by Jamaica, is expected to return to hurricane status as early as this evening, said Aaron Studwell of Weather Insight, a weather forecasting service used by commodities traders.

The storm is still on track to enter the Gulf as a category 3 and is most likely to make land fall along the Louisiana coast, some time early Tuesday. The storm's speed has slowed to about 5 miles per hour, and the latest data shows it has winds of up to 80 mph, Studwell said.

Gustav is expected to track across the majority of the Gulf's oil and gas infrastructure, and also threatens refineries along the Gulf coast. Oil, [US@CL.1 Loading... () ], though, fell on the NYMEX today, as the U.S. Department of Energy and International Energy Agency both said they were ready to help with supplies if Gustav disrupts oil flow.

But refineries shut down ahead of storms and then take some time to return to service. "We'll have a little of that here, whether it's a storm that lingers or if it's catastrophic," said Kloza.

In a note, he pointed out that inventories of gasoline and diesel are now lower on a per-person basis than they were when Katrina hit three years ago.

Refinery runs are also low, but that would make it easier for refineries that are unaffected by the storm to ramp up spare production quickly. Demand is also down; and after Labor Day, it normally falls by an average 442,000 bbl per day, he says.

Kloza says there's a low likelihood the storm will hit a cluster of refineries head-on. "The probability is it won't hit a cluster. But if it does, we didn't do anything precautionary. We are in no better shape than in August 2005, when Katrina hit," he said in a phone interview.

In his note to us, he said: "If a Cat3,4,5 hurricane hits refining clusters, we will see a gasoline spike on the order of 25-75cts gal. Incidentally, the greatest spike will occur in products such as diesel, heating oil, and jet fuel."

There is a cluster of 11 refineries in the New Orleans/Baton Rouge area, including those owned by Exxon [XOM Loading... () ], Conoco [COP Loading... () ], Murphy [MUR Loading... () ], Shell [RDS Loading... () ] and Valero [VLO Loading... () ]. They are responsible for 12.2 percent of the total U.S. refining capacity, and another refinery cluster in Lake Charles, La. accounts for another 4.2 percent of the capacity, according to Lipow Oil Associates.

Mike Fitzpatrick of MF Global says he expects oil, gasoline and natural gas futures to all move higher next week, as Gustav's development becomes more clear. Without the storm, he says he believes crude should be trading in the $117 to $120 per barrel area.

"It looks to me like most of the models estimate that it's going to come ashore late Monday night, early Tuesday morning as a category 4 and hit a very vulnerable spot," he said. If it stays on its current course across the Gulf, "that particular area puts 3,050 of 4,000 platforms and 22,000 of 33,000 miles of pipeline in jeopardy," he said.

Traders have said the real issue for energy prices will be how long it takes Gulf energy producers to restore production after the storm.

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