Who should be feared more, Vladimir or Gustav? Oil traders apparently sweat more about the latter.
The price of West Texas Intermediate crude oil had been rising steadily this week as Tropical Storm Gustav gathered strength. Gustav is bearing down on the Gulf of Mexico, which accounts for about 1.4 million barrels a day of oil production, and possibly Louisiana, home to 17% of U.S. refining capacity. Memories of the devastation wreaked on the U.S. oil industry by hurricanes Katrina and Rita in 2005 loom large.
Compare that with Russia's recent war in Georgia. Oil bulls usually thrive on the miserable things in life: war, bad weather, strikes. But the threat of pipelines being blown up in Georgia, a key transit country for Caspian energy, did nothing: Oil prices actually fell slightly between the opening of hostilities and the signing of a cease-fire.
In terms of sheer scale, Gustav trumps Georgia. As much as 1.2 million barrels of oil a day can cross Georgia by pipeline or rail, according to the Centre for Global Energy Studies. However, most of that goes through the Baku-Tbilisi-Ceyhan pipeline, which was out of action already when the war kicked off and already factored into the oil price. Gustav has the potential to take much more oil suddenly off the market, and damage refineries to boot.
In terms of taking the market's temperature, however, Georgia provides the more accurate measure. Last October, the mere threat of a pipeline in northern Iraq being closed down was cited as a reason for crude oil hitting a record -- despite the pipe being virtually empty. Today, with war in an energy chokepoint provoking yawns from traders, sentiment has clearly turned.
Thursday, all it took was for the International Energy Agency and Energy Department to say they stood ready to release strategic oil stocks to calm the markets: WTI crude fell by more than $2 a barrel.
Falling oil consumption in North America and Europe now sets the agenda. Changing that would require a serious, sustained cut in supply. OPEC could try to achieve this, although the organization might struggle to impose reduced quotas on some of its members. Failing that, there is always the chance of a dreadful winter to lift the bulls' spirits.
-By Liam Denning |
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