Oil prices hit record $70.80 as Katrina wreaks havoc

Simon Webb, Reuters

The region is home to a quarter of total US oil and gas production.

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

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

“The impact on the market is fairly traumatic,” said Frederic Lasserre of SG Commodities. “The forecasters were right about this being an active storm season. We’re having more hurricanes in a market that is already tight.”

Lasserre said the market would assume a similar impact to that of Hurricane Ivan last September, which wiped out a total of around 45 million barrels of US oil output over six months.

The impact of lost production and imports on US crude stocks would likely support prices for some time, he said. “The price floor for the market will be higher than it was before Katrina.”

More than half of all US 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 US government on Monday.

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 the Chevron Corporation’s spokesman Matt Carmichael.

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

“The only way we can avoid yet higher prices is if President Bush releases supply from the Strategic Petroleum Reserve,” said David Thurtell, strategist at Australia’s Commonwealth Bank.

The administration said on Monday it was willing to consider loaning crude from its 700-million-barrel SPR if refiners requested oil.

The US Department of Energy loaned out 5.4 million barrels last year after Ivan.

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% of total US refining capacity.

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

Dealers fear the storm will tighten fuel supplies, which are much lower than relatively robust crude stockpiles and more difficult to replace.