Royal Dutch Shell and Saudi Aramco on Friday said they would go ahead with a $7 billion expansion of the Port Arthur, Tex. refinery that would create the largest U.S. refinery and one of the biggest worldwide.
Crude-oil futures closed slightly lower Friday, taking a break from a record run that began early last week, but the new benchmark contract gained almost 5% for the week as energy facilities in the Gulf of Mexico prepared for a storm.
"Prices are moving higher when a [weather] threat arises ... and then, after pausing briefly, seem to push on to newer highs even after the threat subsides," said Edward Meir, analyst at MF Global, in a research note.
Storm prep
Natural gas gains
On Thursday, the Energy Department reported an increase of 63 billion cubic feet in natural-gas supplies for the week ended Sept. 14. That was within market expectations, but supplies were still up 238 billion cubic feet from the five-year average.
Energy shares piled on more gains Friday, extending a week of gains built on a Fed rate cut, record-high crude prices, and finished off with a round of storm warnings on the U.S. Gulf Coast. At the close, the Amex Oil Index (XOI:1,469.68, +9.12, +0.6%) was ahead 0.6% at 1,469 points, leaving it with a 4.2% advance for the week.
The plan is to expand the refinery's capabilities by 325,000 barrels a day, resulting in a refinery with a throughput capacity of 600,000 barrels a day, according to a statement from Motiva Enterprises, the jointly held unit of Shell (RDS.A: 83.62, -0.58, -0.7%) and the state-owned Saudi Aramco. Motiva said the expansion is the equivalent of building the first new refinery in the U.S. in more than 30 years. It expects the capacity to be online in 2010.
However, the 2006 summer gasoline demand season may have convinced the company that the U.S. refined-product market has reached a tipping point in terms of its gasoline supply-demand balance, with margins moving over $25 a barrel at times," he told clients.
Rob Routs, executive director of downstream at Shell, said the expansion was planned in anticipation that refining margins will decline because of the capacity being added throughout the industry.
Routs added that the refineries it has sold have high cost bases. Refinery bottlenecks have been a key factor in pushing oil prices to record highs, including Thursday's landmark level of over $83 a barrel. According to the International Energy Agency, global refinery throughput in North America is estimated to be 18.4 million barrels of oil a day.
Motiva said it awarded a contract to the Bechtel/Jacobs (JEC: 77.16, +1.66, +2.2%) joint venture to manage the expansion project as the engineering, procurement and construction contractor. The construction will require 4,500 jobs, and the new capacity will result in 300 full-time jobs being created.
The cost of the expansion will be $7 billion, funded mostly through Motiva's earnings, according to a person familiar with the situation. James Neale, a Citigroup analyst, said the decision by Shell could be a surprise given that it has sold some Western hemisphere refining capacity in recent years.
However, the 2006 summer gasoline demand season may have convinced the company that the U.S. refined-product market has reached a tipping point in terms of its gasoline supply-demand balance, with margins moving over $25 a barrel at times," he told clients. U.S. refining margins are around $9 a barrel at the moment, Neale said.
Rob Routs, executive director of downstream at Shell, said the expansion was planned in anticipation that refining margins will decline because of the capacity being added throughout the industry.
"It will be profitable even if margins in the markets are low," Routs said on a conference call. "We want to create a refinery system that's competitive even at low margins."
Routs added that the refineries it has sold have high cost bases. Refinery bottlenecks have been a key factor in pushing oil prices to record highs, including Thursday's landmark level of over $83 a barrel. According to the International Energy Agency, global refinery throughput in North America is estimated to be 18.4 million barrels of oil a day.
Motiva said it awarded a contract to the Bechtel/Jacobs (JEC: 77.16, +1.66, +2.2%) joint venture to manage the expansion project as the engineering, procurement and construction contractor. The construction will require 4,500 jobs, and the new capacity will result in 300 full-time jobs being created.
Crude-oil futures closed slightly lower Friday, taking a break from a record run that began early last week, but the new benchmark contract gained almost 5% for the week as energy facilities in the Gulf of Mexico prepared for a storm.
A weather forecaster at AccuWeather.com downplayed any threat to oil and natural-gas facilities in the Gulf of Mexico, but energy producers in the region prepared for the worst. About 62.7% of the oil production in the Gulf has been shut-in, the U.S. Minerals Management Service reported Friday. It also said that about 30.8% of natural-gas production in the region has been shut down. On its first full day as a front-month contract, crude for November delivery closed 16 cents lower at $81.62 a barrel on the New York Mercantile Exchange. It had touched a low of $80.60 after climbing as high as $82.40 during the session. A week ago, the contract closed at $78.09.
The now-expired October contract saw a high of $83.90 during the regular trading session Thursday and closed at $83.32, both setting records for both regular intraday and closing levels. The October contract had been touching intraday levels above $78 since Sept. 11.
"Prices have slipped, but near-term prices should remain supported by storm concerns in the Gulf," said analysts at Action Economics. "Roughly one-third of Gulf oil production has been shut ahead of a looming storm, which could become a hurricane over the weekend."
The weather system officially became Subtropical Depression Ten, the National Hurricane Center said Friday afternoon, indicating tropical storm conditions are expected within the next 24 hours.
"Prices are moving higher when a [weather] threat arises ... and then, after pausing briefly, seem to push on to newer highs even after the threat subsides," said Edward Meir, analyst at MF Global, in a research note.
Storm prep
AccuWeather.com said on its Web Site that the weather system is likely to make landfall as Tropical Storm Jerry or Subtropical Storm Jerry sometime Saturday, near southeastern Louisiana or just north of the mouth of the Mississippi River.
It's "less of a concern for oil and gas production, as we are expecting it to turn north and move inland before it can reach hurricane strength," said Dale Mohler, a senior meteorologist. Earlier Friday, MF Global's Meir said fear was overriding fundamentals. "However, such a market mindset is not sustainable, and could trigger a rather severe correction once the music stops," he said.
"Neither does a fear of a hurricane explain it, as natural gas, which is even more susceptible to hurricane problems as it is -- essentially a North American market -- were down for the week," he said.
Meanwhile, prices for petroleum products lost ground Friday. Royal Dutch Shell and Saudi Aramco said Friday that they'd go ahead with a $7 billion expansion of the Port Arthur, Texas refinery that would create the largest U.S. refinery and one of the biggest worldwide.
But in an emailed report, the AccuWeather.com also said the storm should not become a major concern for the western Gulf Coast.
It's "less of a concern for oil and gas production, as we are expecting it to turn north and move inland before it can reach hurricane strength," said Dale Mohler, a senior meteorologist. Earlier Friday, MF Global's Meir said fear was overriding fundamentals. "However, such a market mindset is not sustainable, and could trigger a rather severe correction once the music stops," he said.
Overbought?
Actually, "the market looks overbought," said Zachary Oxman, a senior trader at Wisdom Financial. "But that is not holding back a $2 rally as crude quickly approaches the $90+ [per-barrel] level, which I think you'll see by year's end," he said in emailed comments.
"Treat any corrections as buying/accumulating opportunities, as a weak dollar, aggressive Fed, extremely strong global financial climate and strong commodities prices work to push crude higher," he said.
Still, James Williams, an economist at WTRG Economics, pointed out that the weaker dollar only explains about 20% of the upward price movement in oil. "Brent futures prices moved up proportionate to the dollar's fall, but Nymex prices increased 4-5 times as much," he said in emailed remarks.
"Neither does a fear of a hurricane explain it, as natural gas, which is even more susceptible to hurricane problems as it is -- essentially a North American market -- were down for the week," he said. Meanwhile, prices for petroleum products lost ground Friday. Royal Dutch Shell and Saudi Aramco said Friday that they'd go ahead with a $7 billion expansion of the Port Arthur, Texas refinery that would create the largest U.S. refinery and one of the biggest worldwide.
October reformulated gasoline closed at $2.1145 a gallon, down 2.06 cents, while October heating oil fell 0.47 cent to end at $2.2562 a gallon.
Natural gas gains
Natural-gas futures closed higher Friday after suffering from a three-session losing streak.
October natural gas finished the day up 7.2 cents, or 1.2%, at $6.08 per million British thermal units. But it still saw a weekly loss of 3.2% after closing out last week at $6.279.
About 16.7% of natural-gas production in the Gulf has been shut in, according to MMS.
On Thursday, the Energy Department reported an increase of 63 billion cubic feet in natural-gas supplies for the week ended Sept. 14. That was within market expectations, but supplies were still up 238 billion cubic feet from the five-year average.
Energy shares piled on more gains Friday, extending a week of gains built on a Fed rate cut, record-high crude prices, and finished off with a round of storm warnings on the U.S. Gulf Coast. At the close, the Amex Oil Index (XOI:1,469.68, +9.12, +0.6%) was ahead 0.6% at 1,469 points, leaving it with a 4.2% advance for the week.
Refiners and independents led gainers in the Amex oil group, with Sunoco Inc. (SUN:76.96, +2.09, +2.8%) setting the pace on a 2.8% rise to $76.79. Hess Corp. (HES:67.85, +1.45, +2.2%) rose 2.2% to $67.85 and Valero Energy Corp. (VLO:71.05, +0.96, +1.4%) added 1.4% to close at $71.05. Among the big internationals, Exxon Mobil Corp. (XOM:92.31, +0.22, +0.2%) rose 0.2% to $92.31, lagging Friday's 0.4% gain for the Dow Jones Industrials that includes it among its 30 components. Chevron Corp. added 0.7% to $94.84 and U.S.-traded shared of BP Plc. (BP: 71.41, +0.36, +0.5%) rose 0.5% to $71.41. In another major move in the sector, Royal Dutch Shell Plc. and Saudi Aramco announced plans for a $7 billion expansion of their refinery in Port Arthur, Texas, adding 325,000 barrels a day of processing capacity by 2010. When completed, it will be the biggest refinery in the nation and one of the biggest in the world. Royal Dutch Shell's (RDSA: 83.62, -0.58, -0.7%) U.S.-listed shares sat out the extended rally, falling 58 cents, or 0.7%, to finish at $83.62. Much of the sector's gains this week rode on the back of record-high oil prices. The commodity market cooled a bit Friday, however, with the November crude-oil futures contract down 16 cents to $81.62 a barrel in New York. For the week, however, the contract was up 4.5%, with the now-expired October contract at one point topping $84.
Weather concerns continued to support crude prices above the $80-mark. Friday afternoon the National Hurricane Center issued a tropical storm warning for the eastern Gulf of Mexico as a low pressure rain storm off the west coast of Florida showed signs of intensifying. According to the center, tropical storm conditions are possible within the next 24 hours. The weather front is already packing winds of 35 miles per hour. But AccuWeather forecasters said the system is not expected to develop into a hurricane, though it will lash the Gulf Coast with heavy rain, gusty winds and strong surf.
Taking no chances, offshore operators were bringing platform crews ashore and shutting production on dozens of platforms. According to an update from the federal Mineral Management Services office, 62.7% of the Gulf of Mexico's oil production and 31% of its natural gas output has been as a precaution.
So far, crews have been evacuated from 77 of the region's 834 manned production platforms, while 17 of the 89 mobile drilling rigs drilling in the area have been evacuated.
Exxon Mobil (XOM:92.31, +0.22, +0.2%) evacuated approximately 200 employees and contractors from platforms in the Gulf of Mexico due to Tropical Disturbance 50. Approximately 21,000 barrels of liquid per day and 200 million gallons of cubic feet per day have been shut down. The company's shares rose 07% to $92.74.
Storms and high oil prices typically bode well for the oil drilling and services sector. Friday was no exception. The Philadelphia Oil Service Index rose 1.4% to 300.8 points, the first time it has closed above 300. For the week, the index rose a solid 6.1%, with lower interest rates raising the prospect of higher spending by oil and gas producers. National Oilwell Varco (NOV: 144.62, +4.45, +3.2%) led gainers, up 3.2% to an all-time high of $144.62. The stock will be split prior to the opening bell Monday, the Philadelphia Exchange said.
A revised divisor for the index will be announced after the market closes Friday, Sept. 28. Smith International Inc. (SII: 74.00, +2.02, +2.8%) rose 2.8% to $74 a share, hitting a 52-week high of $74.35 along the way, and Noble Corp. (NE: 50.74, +1.29, +2.6%) rose 2.6% to $50.74 after the company said CEO Mark Jackson resigned for personal reasons. Board member William Sears is stepping in as interim CEO. The Amex Natural Gas Index (XNG:519.55, +1.61, +0.3%) rose 0.3% to 519.6 points, clinching a 3.3% gain for the week.
A revised divisor for the index will be announced after the market closes Friday, Sept. 28. Smith International Inc. (SII: 74.00, +2.02, +2.8%) rose 2.8% to $74 a share, hitting a 52-week high of $74.35 along the way, and Noble Corp. (NE: 50.74, +1.29, +2.6%) rose 2.6% to $50.74 after the company said CEO Mark Jackson resigned for personal reasons. Board member William Sears is stepping in as interim CEO. The Amex Natural Gas Index (XNG:519.55, +1.61, +0.3%) rose 0.3% to 519.6 points, clinching a 3.3% gain for the week.
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