Hurricane Could Jolt Oil Markets, But Unlikely To Rock Natural Gas

2011-6-2

With oil markets still jittery in the wake of the Arab Spring, this year's hurricane season could make traders jump if a big storm mows through the Gulf of Mexico's drilling platforms. But tempests are unlikely to make natural-gas traders lose any sleep, thanks to the U.S. shale boom.

"Crude and refined-product markets are going to be more sensitive to storms than natural gas," says Jason Schenker, president of Prestige Economics in Austin, Texas. While the U.S. is awash in natural gas, "there is still genuine concern about supply meeting demand" for oil.

The Atlantic Hurricane season started Wednesday and lasts through November. The U.S. National Oceanic and Atmospheric Administration predicts above-average activity for this hurricane season with 12 to 18 named storms, six to 10 of which are expected to be hurricanes.

NOAA didn't predict how many storms would make landfall nor how many might enter the Gulf of Mexico and disrupt oil and gas production. Last year also saw an above-average hurricane season, but no significant damage to the Gulf Coast's energy infrastructure took place.

The most recent major disruptions came in 2008 when Hurricanes Ike and Gustav blasted U.S. offshore oil fields, slashing production by about one million barrels of oil per day and by four billion cubic feet of natural gas. Those storms' effect on prices was muted by the recession. But in 2005, the year Hurricanes Katrina and Rita caused similar declines in production, natural-gas prices raced higher and oil prices surged.

Today, supply and demand dynamics have significantly changed.

In 2005, gas from the Gulf accounted for 16.5% of total U.S. output, according to EIA data. By 2010, it produced less than 10%. During the first three months of this year, the most recent data available, the Gulf has contributed just 7.4% of total U.S. production.

In earlier years a storm-related shutdown would have a "logarithmic" impact on natural-gas prices, says Brian Habacivch, with energy consultancy Fellon-McCord. "But now you're operating under a surplus and abundance, so that has really pulled the plug on hurricane-season fears," he says.

Some now even view hurricanes as having the potential to push natural-gas prices lower. The same storms that clip offshore production can also decrease onshore demand by knocking out power along the coast and shutting down big users such as refineries and petrochemical plants, not to mention the cooler temperatures that typically follow a hurricane and lessen the need for air conditioning, says Kyle Cooper, managing partner IAF Advisors.

"Tropical storms over the next season or two are highly likely to be net bearish" for natural gas, Mr. Cooper says.

Meanwhile, the Gulf, which produced 1.6 million barrels of oil per day in 2010, is an important source of domestic energy. It accounted for 29.7% of total U.S. output, up from 24.8% in 2005.

That is just a sliver of global production, which averaged 87.9 million barrels per day last year. But the market may be sensitive to such a disruption with global supply already missing about one million barrels a day that has been taken off the market by fighting in Libya.

Oil prices have run higher in the wake of Mideast unrest, reaching $115 a barrel in early May. Oil had been trading in a $90 range before civil strife in Egypt, Libya and other countries in the region. On Wednesday, the contract for July delivery fell 2.4% to settle at $100.29 per barrel on the New York Mercantile Exchange.

Coinciding with peak driving season in the U.S., storms that make landfall run the risk of shutting in production at the Gulf Coast's numerous refineries. If that happens, "gasoline prices can shoot through the roof," says Pax Saunders, an analyst with Gelber & Associates in Houston. "There's a lot of sensitivity there."

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