Friday, June 7, 2013

Energy Risk Management in 2013 Hurricane Season

According to the National Oceanic and Atmosphere Administration (NOAA), the 2013 Hurricane Season is predicted to be more active than normal. In its forecast released on May 23rd, NOAA anticipates 13-20 named storms, with 7-11 of those becoming hurricanes and 3 to 6 of those being Category 3 or higher hurricanes. The averages call for only 12 named storms, 6 hurricanes and only 3 of those becoming major storms. Given this outlook, the question becomes how will this impact natural gas prices?

Natural Gas Prices

Several years ago, the call for an active hurricane season would have sent natural gas futures skyrocketing as concerns about potentially lost production due to shut-ins or damages to wells in the Gulf of Mexico would have created supply fears, especially if coupled with the expectations of high heat and increased air conditioning load. However, with fracking producing at least 30% of total natural gas production in the U.S. according to the Energy Information Administration (EIA), concerns about lost production due to shut-ins caused by hurricanes have dwindled. Gulf of Mexico offshore oil production accounts for 23% of total U.S. crude oil production and federal offshore natural gas production in the Gulf accounts for 7% of total U.S. dry production.

While there are reduced supply side concerns from an active hurricane season, it is important to note that tropical weather can still have an impact on forward natural gas prices. The main reason for this is the concentration of natural gas based transportation and processing facilities located along the Gulf Coast as seen in the following map, which also shows the location of power plants and transmission lines.


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