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.
Given the importance of the natural gas infrastructure along the Gulf Coast, when storms develop and are projected to make landfall somewhere along the Gulf Coast, this will likely cause a temporary spike in forward natural gas prices as the market players become concerned about future processing and delivery.
Impact of Hurricane Season on Energy Risk Management Strategies
Natural gas prices are less likely to spike during hurricane season since more natural gas production now comes from on-shore fields using fracking technology; however, hedging natural gas and electricity summer exposures is a prudent energy risk management. When a storm forms, concerns that production could be shut in, the natural tendency of the market will be to spike, especially in the near term. Even though the reliance of supply from the Gulf has decreased, natural gas inventories are 23.7% below last year’s level and 3.9% below the 5-year average. Therefore, tighter market conditions could trigger a knee-jerk reaction in 2013 if supply is disrupted.
Other Impacts of Hurricanes on Energy Risk Management Strategies
In addition to potentially impacting natural gas and hence power prices, the hurricane season also brings reliability challenges. As seen in the map above, there are also significant amounts of generation and transmission infrastructure along the Gulf Coast that are susceptible to hurricanes. When hurricanes impact this infrastructure, businesses can lose power for extended periods of time, resulting lower electricity and natural gas demand. For instance, when Hurricane Ike hit Houston, downtown was shut for 2 weeks and some businesses were without power for longer periods of time. Back-up generation offers a realistic solution to the potentially devastating impacts of hurricanes and should be seriously considered as part of an energy risk management strategy. It can mitigate the impacts of hurricane damage, but also provide more reliable energy and the ability to participate in demand response programs that can generate revenue to cover the capital cost of a generator.
The 2013 Hurricane Season is predicted to be more active than normal. While only time will bear out the accuracy of this prediction, there are opportunities available for implementing effective energy risk management strategies during hurricane season. In addition, the hurricane season highlights one of the key benefits of back up generation, namely a more reliable source of power than the grid may provide, especially if transmission and distribution infrastructure is damaged as a result of a storm. Energy risk management strategies that take advantage of the opportunities that may arise out of the hurricane season could produce significant benefits for end users.