Oil Spill or Gusher? Have Energy Traders Become Complacent?

The BP drilling disaster in the Gulf of Mexico was originally predicted by Goldman Sachs to create major havoc with shipping and drilling in the Gulf, skyrocketing crude to $100. The market's reaction was to push crude to yearly highs of $87. Weeks went by and not even a drop showed up on Gulf coast beaches. On Friday crude closed under $72, as crude aligned itself with the falling euro. Traders likely have become too complacent with what yet may unfold with the continuing flow of crude.

The photos and film footage streaming from the media the past week appear to show a well coordinated and controlled effort to harness the crude and burn the oil. This has been effective due to perfect weather and easterly sea winds keeping the flow away from major shipping channels. We are now heading into the rainy season for the Gulf where afternoon thunder storms routinely kick up waves 10 to 12 feet. Crude will easily flow under containment booms in this type of weather. Wind direction began changing yesterday, causing the crude flow to move in a westerly direction on a course for Louisiana and the all important offshore petroleum loading platform known as the LOOP.

Of course weather conditions would not matter if the flow of oil could be slowed or stopped. The greatest hope to stop the flow is to drill into the current path and fill with cement compound. This operation will take several months to complete.

There also appears to be a wide discrepancy as to the actual amount of crude flowing. BP only recently released film footage that some are estimating show the flow to be 70,000 barrels per day. If true this eclipses by a wide margin the Exxon Valdez spill which was estimated at 250,000 barrels. Researchers at Massachusetts's Wood's Hole Marine have the technology to properly measure the flow, but have been refused permission to deploy their equipment by both BP and the US Government.

Should a worse case scenario evolve and storms begin driving the crude flow to major shipping channels, not only will crude, gas and diesel spot prices sky rocket, other imported commodities such as wheat, rice and sugar will turn sharply higher as ships are forced to stay at sea, just as if there was a major hurricane striking the Gulf.

Let's hope this catastrophe ends better than expected and loss of marine life is minimal. Caution is needed by energy traders seeing this week's fall in energy futures as a shorting opportunity. Complacency ruled last week, but it is not likely to last in the months ahead.