OVER THE BARREL

Focus: Hurricane Alley, what's the risk?

With hurricane Dean bearing down on the Gulf of Mexico, the market remains nervous over the prospective damage from a hurricane. Last year the absence of a hurricane threat helped ease fears that had started building early in 2006 over prospective supply shortages if a repeat of the storm season and associated damage to oil interests occurred. Instead, the storm season passed without event and the hurricane casualty industry had its best year ever. With the 2007 hurricane season upon us, questions abound on the ultimate impact on price if a hurricane threat develops. Both the ability of the industry to withstand the threat and natures ultimate course will test the oil markets ability to sustain rally attempts.

Looking back at 2005, the hurricane season was exceptional. Not for ninety years had two Category 5 storms traversed the Gulf, with winds upwards of 200 M.P.H. and waves 100 feet high. These storms, which shut in a substantial portion of Gulf of Mexico crude and natural gas production by disrupting rigs and pipelines, also affected refinery and gas processing operations on land.

In order to make an assessment of potential impact, one needs to allow for the fact that current estimates account for some loss of production due to normal weather. For the Gulf of Mexico, hurricanes are a normal weather occurrence, particularly in the August-October time frame, and drilling platforms are made to comply with API regimens. In addition, certain recommendations made since 2005, particularly with respect to anchorage and gap of rigs above the water, have been made. Subsequently, prospective damage estimates from the same storm would likely need to be lowered. In addition, the length of time for repairs to be made has been shortened by the efforts to build up inventories of spare parts in the event of a catastrophe on the order of 2005.

Although hurricanes Katrina and Rita had long lasting effects on oil and natural gas operations in the Gulf, severe weather impact has historically been relatively minor, with most production coming back on line during the following month. Where Rita/Katrina shut in 70 percent of Gulf of Mexico production, on average the total is approximately 1.6 percent of annual Gulf production.

Overall, the hype surrounding a hurricane is many times just that. It tends to take values up to unsustainable levels, given that probabilities favor less than a cataclysmic event such as occurred in 2005. Nevertheless, one still needs to be aware that above normal damage can occur and vigilance should be maintained over the resources offered, such as through the National Hurricane Center tracking site (http://www.nhc.noaa.gov/) where you can compare prospective hurricane paths to areas of rig and pipeline concentration that emanate into the Gulf of Mexico. As was evidenced today with the "Bay of Campeche" being parroted by market pundits, when it looks like one area is safe, there is always a new path to consider.

For more information on Over The Barrel, please contact Steve Platt at 1.877.377.7931 or stephen.platt@archerfinancials.com.

The information and comments contained herein are provided as general commentary of market conditions and are not and should not be interpreted as trading advice or recommendation. The information and comments contained herein are not and should not be interpreted to be predictive of any future market event or condition. The information and comments contained herein is provided by ADM Investor Services, Inc. and not Archer Daniels Midland Company. Copyright © ADM Investor Services, Inc.

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