HardAssetsInvestor

August 29, 2012

Oil Inventories Set To Plunge In The Coming Weeks After Hurricane Isaac Disrupts Output

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While inventories rose in this week’s EIA report, expect a sharp reversal in future storage levels.

The Department of Energy reported this morning that in the week ending Aug. 24, U.S. crude oil inventories increased by 3.8 million barrels, gasoline inventories decreased by 1.5 million barrels, distillate inventories increased by 0.9 million barrels and total petroleum inventories increased by 4.7 million barrels.

Crude oil prices fell after the latest inventory figures from the EIA. The big story all week in the oil markets was Hurricane Isaac, but the storm’s impact won’t be felt until next week’s report.

Though Isaac has come and gone, today the Bureau of Safety and Environmental Enforcement said that over 1.3 mmbbl/d, or 95 percent, of Gulf oil production was still shut in due to the storm. Operators will now have to survey oil facilities to see if any lasting damage was done by the hurricane before output can resume.

Given that Isaac was only a category 1 storm, there is not a high likelihood of significant damage. Hurricanes Katrina and Rita, which devastated the Gulf of Mexico oil industry in 2005, were category 5 storms.

But even Isaac’s temporary disruption has taken oil off the market. Thus far, approximately 4.1 million barrels of output has been lost. That figure may grow to 7 million to 10 million barrels by the time Gulf output fully resumes.

Those lost barrels will impact the next one or two EIA inventory reports, which should show steep drawdowns in storage.

Looking at current oil prices, Brent is currently consolidating between $112 and $117 after the steep rally over the past two months. We still expect prices to eventually climb to our next objective of $120.

Meanwhile, WTI is stuck between $95 and $98, and we anticipate the U.S. benchmark will outperform its European counterpart over the next few months.

BRENT

WTI