Oil Falls on Speculation Isaac Will Have Limited Impact

Oil Declines on Speculation Storm Will Have Limited Impact
Satellite image from Aug. 24 of Tropical Storm Isaac. Source: NOAA

Oil fell for a third day on speculation that Tropical Storm Isaac will have limited impact on production in the Gulf of Mexico.

Futures dropped as forecasts called for Isaac to go ashore Aug. 29 south of New Orleans as a Category 1 storm, the weakest on the five-step Saffir-Simpson scale. Losses narrowed after the U.S. Bureau of Safety and Environmental Enforcement said Isaac has shut 78 percent of Gulf production, up from 24 percent reported yesterday.

“It doesn’t look like Isaac is going to strengthen and it’s hard to maintain a rally in the face of a storm of that strength,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy. “All of the facilities are built to withstand Category 2 storms so it really should be a non-event.”

Oil for October delivery fell 68 cents, or 0.7 percent, to settle at $95.47 a barrel on the New York Mercantile Exchange. It rose as much as 1.6 percent earlier to $97.72. The price is down 3.4 percent this year.

Brent oil for October slid $1.33, or 1.2 percent, to settle at $112.26 a barrel on the London-based ICE Futures Europe exchange.

Isaac was 280 miles (450 kilometers) southeast of the mouth of the Mississippi River with top winds of 65 miles per hour and moving northwest at 14 mph, the National Hurricane Center said in an advisory at 2 p.m. East Coast time.

“Isaac was providing a bit of a boost but it’s temporary,” Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Connecticut, said. “The impact is mainly psychological and a lot of it has already been priced in.”

Evacuating Platforms

Companies including BP Plc, ConocoPhillips and Murphy Oil Corp. were evacuating personnel or halting production at offshore rigs and platforms. About 58 percent of Gulf platforms and 54 percent of rigs were evacuated, based on information from 62 companies provided to the government.

“The storm is not going to be that powerful and people don’t expect significant disruption,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts.

Isaac is arriving seven years after Hurricane Katrina struck the Gulf Coast on Aug. 29, 2005. Katrina grew into a Category 5 system, the strongest, and went ashore as a Category 3, according to Weather Underground in Ann Arbor, Michigan.

Isaac won’t have the power of Katrina, said Jim Rouiller, senior energy meteorologist at Planalytics Inc. in Berwyn, Pennsylvania. It will probably cause minimal damage to rigs and platforms as well as onshore refineries and pipelines, he said.

Category 1

“A Category 1 really isn’t going to cause much trouble,” said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $1.4 billion. “Until you get to a Category 3 or above, it’s not a big problem.”

The Gulf is home to 23 percent of U.S. oil production, according to the U.S. Energy Department in Washington. About 44 percent of refining capacity is on or near the Gulf Coast.

Prices also fell on speculation that big consuming countries will release emergency storage and that the Federal Reserve won’t announce an immediate plan to stimulate the economy and boost demand.

The U.S. may lead International Energy Agency member nations in a joint release from emergency oil reserves as early as next month to curb rising prices, the industry publication Petroleum Economist reported on Aug. 24, citing sources it didn’t name.

‘Intensifying Speculation’

The IEA has backed the move, reversing what had been vocal opposition, to discourage the U.S. from unilaterally tapping its Strategic Petroleum Reserve, the London-based journal said.

“The market is intensifying speculation of a global coordinated SPR release,” Kilduff said.

Fed Chairman Ben S. Bernanke probably won’t use his Aug. 31 speech at the Fed’s annual symposium in Jackson Hole, Wyoming, to suggest a third round of bond buying is at hand, according to economists surveyed by Bloomberg.

“The market is a little skeptical about the Fed,” McGillian said. “It doesn’t look like the bulls want to try to make another run toward $99.”

The central bank bought a total of $2.3 trillion in bonds from December 2008 to June 2011 to stimulate the economy in two rounds of asset purchases known as quantitative easing.

Electronic trading volume on the Nymex was 396,821 contracts as of 2:48 p.m. in New York. Volume totaled 417,074 contracts on Aug. 24, 23 percent below the three-month average. Open interest was 1.51 million.

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