Katrina Wreaks Havoc On Oil Market

The potential damage to oil platforms, refineries and pipelines that remain closed along the Gulf Coast drove energy prices to new highs Tuesday, with crude futures briefly topping $70 a barrel and wholesale gasoline costs surging to levels that could lead to $3 a gallon at the pump in some markets.

The buying frenzy reflected uncertainty and fear about the full extent of the damage Hurricane Katrina inflicted on key energy infrastructure.

Tom Kloza, director of the Wall, N.J.-based Oil Price Information Service, told CBS' Julie Chen of The Early Show that Hurricane Katrina hit the U.S. oil supply at the "worst possible time," because it is driving season and prices are already high.

"This is an extremely serious situation," said Kloza.

Analysts said that even if Katrina did less harm than feared its effects would nevertheless tighten the availability of already scarce refined products, such as heating oil and gasoline.

A JP Morgan report released Tuesday says Katrina has already forced a production halt in about 630-thousand barrels of crude a day from the Gulf of Mexico, some 12 percent of daily output. Analysts say that figure is likely to rise significantly in the coming days, once assessments are made.

Analysts are concerned that the slower production could constrain the supply of home heating fuels for winter and they note the hurricane season isn't over yet.

And analysts believe that the operations of natural gas processors and chemical manufacturers, who depend heavily on the natural gas as a feedstock, could be disrupted for days, if not weeks.

"Refineries are flooded, don't have power, are under very, very dire circumstances," Kloza told Chen.

In wholesale markets on the Gulf Coast, some gasoline was being priced as high as $2.85 a gallon and in the Midwest, prices were as high as $2.65 a gallon, Kloza said.

Retail costs are typically 60 cents higher, meaning motorists in these regions could very well see pump prices exceed $3 a gallon.

Light sweet crude for October delivery rose $2.61 to settle at $69.81 a barrel, a record close since trading began in 1983 on the New York Mercantile Exchange. Prices had reached as high as $70.85, an intraday high on Nymex, although still below the inflation-adjusted high of about $90 a barrel that was set in 1980.

September gasoline futures rose 41.39 cents to settle at $2.4745 a gallon on Nymex, where trading was halted briefly after the exchange's 25-cent trading limit was reached. Heating oil futures climbed 16.71 cents to $2.0759 a gallon.

The run-up in natural gas and heating oil futures may mean sharply higher home-heating bills lie ahead this winter.

Companies are scrambling to assess damage to their platforms, pipelines and refineries — a task easier said than done in some cases because, in addition to flooding, the Gulf Coast has been plagued by power outages. More than 2.1 million customers have reported power outages in Louisiana, Mississippi, Alabama and Florida.

Most energy companies still have not been able to visit their facilities and are relying on aerial surveillance for preliminary examinations.

Such is the case for Chevron Corp., which shut down its 325,000 barrel a day Pascagoula, Miss., refinery before Katrina's arrival.

"We are hoping to get in there today, but that's the issue — getting there," said company spokesman Michael Barrett. "It could still be a while before that happens."

Marathon Ashland Petroleum LLC was also playing a waiting game to reach its 245,000 barrel a day refinery in Garyville, La. "We are trying to re-board and assess what, if any, damage has occurred and what work needs to be done before we can restart," spokesman Paul Weeditz said.

Others were able to identify some trouble by late Monday. Valero Energy Corp. said its St. Charles refinery in Norco, La., which has capacity of 260,000 barrels a day, might not be restarted for another two weeks.

Nymex oil futures settled at roughly $67 a barrel Monday, easing from highs above $70 a barrel amid speculation that the Bush administration might release crude from the U.S. Strategic Petroleum Reserve.

But some analysts on Tuesday said the impact of such a move would be minimal for now, because the problem is not supply, but rather refining capacity.

"The release of crude out of the Strategic Petroleum Reserve is not as critical as making sure that there is enough refined product supply and that there are refineries to process the crude," said analyst Victor Shum from Texas-based consultants Purvin & Gertz.

At least eight Gulf Coast refineries in the path of Hurricane Katrina shut down or reduced operations, taking out anywhere from 8-10 percent of production capacity, according to company and federal reports.

Katrina, which struck the Gulf Coast as a Category 4 storm, was blamed for dozens of deaths and the evacuation of more than 700 offshore platforms and rigs. It slammed into a major oil production hub at a time when producers worldwide were already struggling to cope. The latest storm of the Atlantic hurricane season now threatens to constrain the supply of home heating fuels for the North American winter, a season of traditionally high demand.

Organization of Petroleum Exporting Countries secretary general Adnan Shihab-Eldin reiterated Tuesday that the group will supply extra barrels of crude oil to refiners if they want them. Previous OPEC pledges have done little to ease market fears over supply.

The U.S. Minerals Management Service said Monday that 92 percent of the region's oil output was out of service, with more than 3 million barrels of production lost since Friday. The agency said 83 percent of natural gas output was shut down, resulting in a loss of 15.5 billion cubic feet of lost production since Friday.

The Gulf of Mexico normally produces 2 million barrels of crude oil a day and about 10 billion cubic feet a day of natural gas.