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Isaac's limited impact speculation causes oil prices to fall

A map tracking the path of Tropical Storm,

A map tracking the path of Tropical Storm, which has been forecasted to become a Category 1 hurricane. Photo Credit:

Oil fell on speculation that Tropical Storm Isaac will have limited impact on oil production in the Gulf of Mexico.

Prices dropped as forecasts called for Isaac to go ashore Aug. 29 in southeastern Louisiana as a Category 1 storm, the weakest on the five-step Saffir-Simpson scale. Isaac has shut 24 percent of U.S. production from the Gulf, the Bureau of Safety and Environmental Enforcement said yesterday.

"It doesn't look like Isaac is going to strengthen and it's hard to maintain a rally in the face of a storm of that strength," said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy. "All of the facilities are built to withstand Category 2 storms so it really should be a non-event." Oil for October delivery fell 96 cents, or 1 percent, to $95.19 a barrel at 11:07 a.m. on the New York Mercantile Exchange. It rose as much as 1.6 percent earlier to $97.72. Oil is down 3.7 percent this year.

Brent oil for October settlement slid 88 cents, or 0.8 percent, to $112.71 a barrel on the London-based ICE Futures Europe exchange.

Isaac was 310 miles (500 kilometers) southeast of the mouth of the Mississippi River with top winds of 65 miles per hour and moving west-northwest at 14 mph, the National Hurricane Center said in an advisory at 11 a.m. East Coast time.

"Isaac was providing a bit of a boost but it's temporary," said Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Connecticut. "The impact is mainly psychological and a lot of it has already been priced in." Evacuating Platforms Companies including BP Plc, ConocoPhillips and Murphy Oil Corp. were evacuating personnel or halting production at offshore rigs and platforms. The Louisiana Offshore Oil Port, the largest point of entry for crude coming into the U.S., said it planned to suspend offloading tankers today.

Isaac is arriving seven years after Hurricane Katrina struck the Gulf Coast on Aug. 29, 2005, causing levees to fail in New Orleans and killing more than 1,800 people.

Isaac won't have the power of Katrina, said Jim Rouiller, senior energy meteorologist at Planalytics Inc. in Berwyn, Pennsylvania. It will probably cause minimal damage to rigs and platforms as well as onshore refineries and pipelines, he said.

"The storm is not going to be that powerful and people don't expect significant disruption," said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts.

Category 1 Isaac is expected to peak at Category 1 strength, which includes storms with sustained winds of 74 to 95 mph. Katrina grew into a Category 5 system, the strongest, and went ashore as a Category 3, according to Weather Underground in Ann Arbor, Michigan.

"A Category 1 really isn't going to cause much trouble," said Bill O'Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $1.4 billion. "Until you get to a Category 3 or above, it's not a big problem." The Gulf is home to 23 percent of U.S. oil production, according to the U.S. Energy Department in Washington. About 44 percent of refining capacity is located on or near the Gulf Coast.

Strategic Reserves Prices also fell on speculation that big consuming countries will release emergency storage and that the Federal Reserve won't announce an immediate plan to stimulate the economy and boost demand.

The U.S. may lead International Energy Agency member nations in a joint release from emergency oil reserves as early as next month to curb rising prices, the industry publication Petroleum Economist reported on Aug. 24, citing sources it didn't name.

The IEA has backed the move, reversing what had been vocal opposition, to discourage the U.S. from unilaterally tapping its Strategic Petroleum Reserve, the London-based journal said.

"The market is intensifying speculation of a global coordinated SPR release," Kilduff said.

Fed Chairman Ben S. Bernanke probably won't use his Aug. 31 speech at the Fed's annual symposium in Jackson Hole, Wyoming, to suggest a third round of bond buying is at hand, according to economists surveyed by Bloomberg.

"The market is a little skeptical about the Fed," McGillian said. "It doesn't look like the bulls want to try to make another run toward $99." Electronic trading volume on the Nymex was 238,731 contracts as of 10:32 a.m. in New York. Volume totaled 417,074 contracts on Aug. 24, 23 percent below the three-month average. Open interest was 1.51 million.

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