Hurricane Ike, Refining Capacity, and Crude Oil Prices

It should once again be an interesting week for crude oil. It appears that Hurricane Ike shutdown 19 percent of refining capacity, causing analysts to predict that gasoline may once again rise to $4 per gallon on average if the outages start to approach a month or longer (see Bloomberg article). While some refineries escaped damage, extensive power outages and closed transportation and shipping lines will make it difficult to return to normal operations quickly. While gasoline prices were on the rise late last week, the effect on crude oil was a little less certain. On Friday, as the storm was still in the gulf, crude oil traded below $100 a barrel for a short time before finally closing above $102 a barrel. Crude oil has recently been looking for reasons to go down as it has sold off after reaching prices in the $140s a just a few months. Whether the current disruptions in the gulf and the recent breaking and bouncing of crude oil prices off the psychological barrier of $100 will help to reverse the slide in crude oil (which has been selling-off even on good news), should become a little more clear as the week progresses. Rumors of funds liquidating various commodity positions, aided by speculators now taking short positions (see previous post), have been given as reasons for the recent slide in crude oil and commodities in general. This week may give an indication of how strong the selling is, and whether some funds will take any run-ups in crude prices as an opportunity to sell into strength. Taking some production off-line, even a small amount, should help to signal the current level of strength of the crude oil market. If this current development is shaken-off in short order, crude oil bears may in fact see the $80 a barrel price they have been predicting. This week should provide a little more clarity, but then again, with crude oil this seems to be a popular refrain.