This column was originally published on RealMoney on Aug. 23 at 2:08 p.m. EDT. It's being republished as a bonus for TheStreet.com readers.For crude oil investors, the shoulder season is close at hand, and that means more hand-wringing over the future price. It is true that peak driving season -- the period in which many Americans take to the roads for family vacations -- will officially end with the passing of the Labor Day holiday. That will likely provide marginal relief for gasoline prices, which were lower midday Wednesday, after the Energy Department's weekly inventory report showed an unexpected increase of 400,000 barrels vs. expectations for a decline of 2 million barrels. But the increase in gasoline inventories is a result of increased refinery utilization and imports, rather than a meaningful reduction in demand. Crude futures were down as well after the government said inventories dropped by 600,000, but remain nearly 5% above year-ago levels. However, those who are hopeful for a precipitous fall in crude oil and gasoline prices need to consider not only the fundamental figures, but also a couple of very important data points unique to the 2006 fall shoulder season.
Take, for example, activity in Saudi Arabia's legacy fields, such as Gwar. Aramco will double the number of rigs drilling development wells this year -- from approximately 60 to 120 -- with little change in production. Rather, the additional wells simply are making up for the production declines in existing wells. The Saudis are likely to increase the rig count another 50% in 2007 simply to stem the decline. As a result, even with new crude oil discoveries -- which may well take years to get to market --- supply isn't likely to flood the market. Rather, we may well find such new crude supplies will be required simply to assure supply keeps pace with steadily growing demand. The above analysis does not factor in further disruptions in crude supply stemming from geopolitical events. While the cease-fire between Israel and Lebanon has helped reduce the risk of Middle East instability, there are plenty of other hot spots that could impact crude supply, including Iran's quest for a place at the nuclear table. Add to that concerns in Iraq, Nigeria, Venezuela and Russia, and the list of smoldering conflicts that could impact oil supply lengthens. As noted before, it's not how big the "risk premium" is, it's how long its lasts. From where I sit, it doesn't dissipate anytime soon.
Those investors should have been reminded of that impact on Monday, when Helix Energy ( HLX - Get Report) purchased three GOM energy projects from Chevron ( CVX - Get Report) and its partners. The deal was a stark reminder of just how challenging recovery in the Gulf has been, as two of those fields remain offline even today, the result of damage from Rita. In addition to that sale, Chevron is set to spend millions on Gulf of Mexico reclamation, work that is likely to take at least another year. Companies like Superior Energy Services ( SPN - Get Report), Hornbeck Offshore ( HOS - Get Report) and many others continue to talk of nine to 12 months of additional work related solely to the storms' damage. While the government has discontinued issuing regular reports on production outages related to last year's storms, expectations of additional production anytime soon seem unrealistic. In addition to production challenges, this fall is likely to see a significant amount of refinery turnaround maintenance as refiners -- especially those with Gulf Coast exposure -- work overtime to deal with refineries that have been pushed to the limit in the past year and and are in need of preventative servicing. This situation will limit the ability to build large stockpiles of gasoline or heating oil and could have a surprising impact on inventories and, as a result, price. Sure, Labor Day may bring some moderation in gasoline prices. But to expect a sharp drop in crude oil and gasoline prices is simply to be ignorant of the energy reality facing the U.S. and the world.