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Oil experts relieved with Rita's path shift

Oil experts breathed a guarded sigh of relief Friday and crude prices fell sharply as Hurricane Rita’s path shifted away from Houston, the heart of the U.S. refining industry.
/ Source: Reuters

Oil experts breathed a guarded sigh of relief Friday and crude prices fell sharply as Hurricane Rita’s path shifted away from Houston, the heart of the U.S. refining industry.

Rita, packing 135 mile per hour winds, was heading for landfall late Friday or early Saturday at the Texas-Louisiana border, east of Houston, said the U.S. National Hurricane Center. However, it remained unclear where the storm will actually strike the coast.

“Prior to its current path, we were looking at the worst case scenario for the industry with the hurricane striking Houston,” said John Kilduff, senior vice president for energy risk management at Fimat USA. The Houston area accounts for more than 13 percent of total U.S. refining capacity.

“It saves us from the worst. But this will still be pretty bad,” he added.

U.S. crude oil futures reflected the market’s relief at the slight change in Rita’s course.

Crude oil fell more than $2 to trade as low as $64 a barrel on the New York Mercantile Exchange at midday Friday. Gasoline futures also fell sharply.

However, Rita remains a large storm that will blanket the upper Texas coast with hurricane-force winds for about 16 hours, according to state emergency officials.

The entire city of Port Arthur, Texas, was expected to be flooded with a storm surge of up to 22 feet. Port Arthur is home to several refineries including Motiva’s 285,000 barrel per day plant, Total Petroleum’s 233,500 bpd refinery and Valero’s 250,000 bpd unit.

Nearly 30 percent refining halted
Fifteen Texas and Louisiana refineries shut down ahead of Rita, in addition to the four that remained closed since Hurricane Katrina swept through the Gulf of Mexico nearly a month ago. In total, nearly 30 percent of U.S. refining capacity was halted.

The U.S. market has lost 2.2 million bpd in gasoline production and another 1.2 million bpd in distillate fuel output from the closing of the refineries.

However, Shell Oil said it aims to bring its 340,000 bpd refinery in Deer Park, Texas, back on line on Sunday. Marathon Oil also said it hopes to restart its 72,000 bpd refinery in Texas City Sunday.

Analysts said it could take a week after Rita hits before all the refineries could return to normal operations.

“This is the most disruptive event in the U.S. oil  industry at least in my lifetime,” said Joseph Arsenio, analyst at Arsenio Capital Management. “This will be felt for at least a year or two.”

“I don’t expect there will be any progress until next Wednesday simply because it takes time to get back into the area,” he added.

The first thing oil traders will want to know after the storm is the status of the refineries, analysts said.

London’s International Petroleum Exchange said it would open electronic trading in its Brent crude oil and gas oil futures contracts late Saturday to give traders an opportunity to react to Rita.

The International Energy Agency planned to meet on Saturday to assess Rita’s impact and decide if it should order the release of gasoline reserves. After Katrina, IEA members --including the United States -- released about 60 million barrels of crude oil and gasoline.

The Bush administration said it was prepared to loan crude oil from the government’s emergency stockpile to refineries that cannot receive tanker shipments after Rita. The government has other options to help keep oil flowing, including relaxing anti-pollution regulations for gasoline and suspending the Jones Act so foreign vessels can transport crude oil and gasoline between U.S. ports.