Volatility Rules Energy Market

Retail gasoline prices jump to a record $2.82 a gallon.
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Updated from 11:29 a.m. EDT

The volatility in U.S. energy markets shows no sign of abating as refiners, drillers and transport companies grapple with a labyrinth of problems in trying to restore their storm-ravaged capacity.

Crude futures zigzagged all week as pessimism over rig and refinery destruction in the Gulf Coast was occasionally offset by moves to bring emergency energy stockpiles to bear. The October contract closed at $67.57 a barrel Friday, down $1.88 from the previous close but up about 2% since Hurricane Katrina came ashore.

Trading was even more frenzied in unleaded gasoline markets, where front-month contracts for a gallon of unleaded added about 30%, although they closed down 26 cents at $2.14 on Nymex. Both crude and unleaded gasoline eased Friday as companies reported halting success bringing pipeline and other transportation capacity back online.

But the road to a more-complete remediation remains tortuous and fraught with peril.

"The physical damage goes way beyond what we've ever seen," said Steve Campbell, the manager of investor relations for

Newfield Exploration

(NFX)

. "Hurricane gusts and 50-foot waves have done damage that we are just beginning to asses but don't fully know yet."

Even when problems can be tracked down, repair efforts pose their own special challenges.

"The humanitarian aspect is a serious problem," Campbell said. "We have contractors that have lost their homes, lost their boats, we are now mobilizing crews from as far as Texas to asses damage in Louisiana. You can't ask a crew guy to go offshore to a rig when his house is under five feet of water."

The same issue afflicts utilities scrambling to restore power. As of Thursday, the government said, about 1.8 million homes were without power mainly in Louisiana, Alabama and Mississippi.

"Inaccessibility as well as extensive damage from flooding and saltwater are major issues impacting electricity restoration," the Energy Department said in a report. "

Entergy

reports that its single biggest problem to restoring power is the lack of food and water for its repair crews who are literally sleeping in their trucks."

Meanwhile, major questions surround the underwater pipeline network off the Gulf Coast. In an op-ed piece in the

Wall Street Journal

Friday, energy author Daniel Yergin said underwater mudslides complicated repairs after Hurricane Ivan, which hit last year.

"Initially, 1.5 million barrels per day of oil were shut down with both Ivan and Katrina. Within six weeks of Ivan, the shut-in capacity was reduced to just 200,000, which persisted for several months. But Katrina was worse than Ivan and hit more of the bull's-eye. Unlike Ivan, it also devastated a significant part of the onshore logistical infrastructure that supplies the offshore. That suggests a slower rebound," Yergin wrote.

On the bright side, the International Energy Agency, a private organization coordinating petroleum policy for 26 mostly European countries said Friday it will provide the U.S. with 60 million barrels of crude and refined products.

At 2 million barrels a day, the IEA's contribution is roughly the amount of production being shut in due to power outages and held-up crude deliveries.

Energy Secretary Sam Bodman also said that the government made a decision to release 30 million barrels from its strategic petroleum reserves for loans and sales to refiners through auctions.

More relief was provided by the restart of several pipelines and the Louisiana Offshore Oil Port, which is running on emergency generators. The Energy Department said three of the major pipelines that transfer fuels to the East Coast are back on line, though delivering at reduced capacity.

Gasoline futures traded frantically amid a growing realization that restarting eight southeastern oil refineries that make up 10% of U.S. capacity will take weeks. At the same time, unrefined fuel flowing into plants that are still running has dried up due to the storm's hit to U.S. crude output.

On Thursday, the U.S. Minerals Management Service said 480 oil platforms and 79 drilling rigs in the Gulf of Mexico remained unmanned. About 1.36 million of daily U.S. crude production has been curtailed by Monday's storm -- about 90% of the area's usual output.

The bottlenecks are showing up at gas stations as skyrocketing prices as well as gasoline shortages and outages in some areas. The American Automobile Association said the average price of unleaded gasoline was $2.82 a gallon Thursday, a new record high based on unadjusted dollars.

President Bush, who has taken several steps to avert an energy crisis, said in a speech Thursday that Americans should exercise "prudence" in their energy consumption in coming weeks, adding "Don't buy gas if you don't need it." Bush suspended rules restricting foreign tankers from delivering oil to U.S. ports.

On Thursday, the administration announced the release of roughly 8.5 million barrels from the strategic petroleum reserve. The crude will be lent to companies including

ExxonMobil

(XOM) - Get Report

and

Valero

(VLO) - Get Report

to keep refineries supplied.

Speaking Thursday night, Ben Bernanke a White House economist who is viewed as a candidate to succeed Alan Greenspan, predicted that U.S. gasoline prices will ease as more capacity comes online in the Southeast.

As a direct result of Katrina's impact, analysts at Friedman Billings Ramsey, raised their 2005 and 2006 earnings estimates for all refineries under their coverage, and increased the refining sector's rating to overweight. The research firm said gasoline inventories are likely to fall 5% to 10% over the next few weeks, while inventories are already 6% lower than last year

"The market appears to be forecasting that this tight refined-product market will continue, raising the forward curve for refining margins for 2006 to over 20% above 2005 levels," FBR said. "We agreed and have raised our crack spread estimates."

Refining crack spreads for Gulf Coast WTI crude, or the price difference between the raw material and the refined product, was roughly $6.5 a barrel in the first quarter of 2005, $9 a barrel in the second quarter and are estimated to reach $11 a barrel by year's end, according to FBR.

The firm raised

Frontier Oil's

(FTO)

2005 earnings estimate to $3.60 a share, from $2.65,

Tesoro's

(TSO)

full year earnings to $8 a share from $6.50, and

Giant Industry's

(GI)

earnings to $5.65 a share, from $4.50.