Storms, oil, and elections

Hurricane Sandy was bearing down on the East Coast on Oct. 29, disrupting oil supplies, energy demand, and early voting in the last full week before the US presidential election.

Although apparently gaining strength, Sandy was still a Category 1 hurricane—the lowest classification—when 260 miles south of New York City with a projected nighttime landfall in New Jersey. But weather forecasters said Sandy likely would collide with an eastbound winter storm that was dumping snow in West Virginia and a cold Arctic air stream blowing in from the north to form a super-storm that could disrupt communities from the Great Lakes to the West Coast.

East Coast refineries were shutting down or curtailing production ahead of the hurricane. Analysts in the Houston office of Raymond James & Associates Inc. reported 7% of US refining capacity is in the storm’s path. “The shutdowns in an already undersupplied Atlantic Basin product market should be bullish for cracks, though we'd note that this could be partially offset in the very short-term by the bearish demand implications of shutting down activity in the New York area,” they said.

Some 375,000 people were ordered out of flood-prone zones in New York City, traffic tunnels were closed, and stock markets shut down—the first unplanned closing of the New York Stock Exchange since the September 2001 terrorist attacks. Flooding was reported in New Jersey and Delaware, and there were power outages in Connecticut and Virginia. Schools and public transportation shut down in Pennsylvania.

On television, news show “talking heads” debated whether challenger Mitt Romney or President Barack Obama was most likely to benefit from or be damaged by the storm in their down-to-the-wire race. Obama could “appear presidential” by postponing his campaign to be photographed bringing aid and comfort to storm victims, they concluded. However, they recalled President George W. Bush’s drop in the popularity polls when federal agencies were slow to provide assistance in the wake of Hurricane Katrina in 2005. Meanwhile on one weekend TV news show, a pundit claimed Obama may take Ohio in the election, crediting him for supporting hydraulic fracturing and for increased employment in that state’s gas boom.

The US is not the only country with weather woes, of course. Recent flooding in Nigeria has displaced more than a million people and shut down oil production.

Analysts at Barclays Capital Inc. said, “For the oil market, with balances already under pressure from a supply system subject to several disruptions, the Nigerian outage only adds to the pressure. Not only is this deficit large in absolute terms, representing 0.5% of global supplies, but the fact that the crude cargoes being affected (Bonny light and Forcados) are of the high quality light, sweet grade makes the void in the supply system even more pronounced.”

Natural gas prices

Meanwhile, Raymond James analysts—not among the talking heads—said the solution to low prices for natural gas is—low gas prices. They noted US gas prices “tanked last winter due to way too much gas supply and way too little weather-related gas demand.” Since then, gas supply growth has slowed due to low market prices, so anything near normal winter weather should increase demand, tighten the market, and raise prices. They said, “The combination of these two factors (and a few other lesser ones) leads us to believe that US natural gas prices should be much higher this winter than last.” As a result they raised their fourth quarter gas price assumption by 75¢/Mcf, increasing their average price forecast for all of 2012 to $2.82/Mcf from $2.63/Mcf. “We are also raising our 2013 gas price forecast from $3.25/Mcf to $3.75/Mcf, with first quarter potentially spiking to $5/Mcf.”

However, they cautioned, “Energy investors should be careful not to assume that a winter price surge suggests a new $5/Mcf US natural gas paradigm. In fact, we think that these higher winter prices will lead to a reversal in the coal-to-gas switching that surged last spring. That means that we expect summer 2013 natural gas prices to retreat sharply from winter highs but still average much higher than in 2012. In other words, expect much more gas price volatility in 2013.”

Raymond James analysts said, “Longer term, gas fundamentals continue to improve, and natural gas prices should steadily drift higher in 2014 and beyond. As such, we are raising our 2014 gas price outlook by 25¢ to $4.25/Mcf.

(Online Oct. 29, 2012; author's e-mail: samf@ogjonline.com)

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