Storms may no longer boost gas prices

Aug. 23, 2010
With gas operations shifting onshore, and offshore increasingly "hardened" by hurricanes, the historical tendency for storms to give gas prices an automatic boost may be over, said Adam Sieminski, chief energy economist, Deutsche Bank, Washington.

With gas operations shifting onshore, and offshore increasingly "hardened" by hurricanes, the historical tendency for storms to give gas prices an automatic boost may be over, said Adam Sieminski, chief energy economist, Deutsche Bank, Washington.

Weather events may start to have a more influence on commodity markets, specifically energy and agriculture. But loss of some "weaker" rigs in the Gulf of Mexico earlier this decade may mean the oil, gas, and oil products markets may prove more resilient to extreme weather conditions than before 2005, Sieminski reported.

He said certain markets may be more susceptible to weather events. "Rising use of corn for ethanol production and Chinese import requirements would also indicate a further tightening in demand-side fundamentals for corn over the medium term," he said. "Although there is potential for the wheat-corn spread to widen further in the short-term, easing concerns over Russian drought and higher Chinese corn imports will enable this trade to perform. We believe the main risk to this trade would be further losses in European wheat production as a result of drought conditions intensifying."

La Nina factor

Development of El Nino conditions at the end of 2009 and subsequent intensification contributed "to the warmest year so far on record," said Sieminski. While energy markets have escaped any major weather disruption of production, droughts in Russia and Kazakhstan drove wheat prices higher in July. Now as El Nino fades, meteorologists see the possibility of an emerging La Nina phenomenon that usually increases hurricane activity in the western Atlantic. The National Oceanic and Atmospheric Administration and others expect the 2010 hurricane season to be among the most active on record.

Sieminski said, "Historically, we find that a more active hurricane season has tended to sustain price rallies in US natural gas for longer compared with crude oil. However, this relationship may have changed since 2005 and the devastating effects of Hurricanes Katrina and Rita on offshore gas rigs." Last year's El Nino contributed to a below-normal Atlantic hurricane season. Now, Sieminski said, "Conditions in the equatorial Pacific Ocean are becoming increasingly favorable for the development of a La Nina season over the remainder of 2010 and into early 2011."

He reported, "Since the mid-1990s there has been a tendency for oil prices to creep higher in the days before a major hurricane hit US landfall. However, these small gains were surrendered relatively quickly once the storm had hit the US mainland." He said, "In nine of the major hurricanes to hit the Gulf of Mexico states since 1995 only one, Hurricane Ivan in 2004, has seen oil prices trade higher in the 2 weeks after the hurricane hit US landfall. Consequently history would tend to suggest that it is more prudent selling any hurricane induced rise in the crude oil price."

On the other hand, Sieminski said, "For natural gas, prior to 2005, it was 'buy the news, sell the fact,' and if there was significant infrastructure damage, then price had upward momentum post-landfall." But now, "More of the natural gas infrastructure is either shifting onshore (shale gas, for example), or increasingly 'hardened' from the Darwinian-like process of repeated hurricanes (only the strong have survived)."

Corey Lefkof, Deutsche Bank's meteorologist in Houston, said several weather conferences in recent years have suggested unless more offshore gas rigs are built—unlikely in the current political environment—any hurricane of Category 1 or 2 strength that makes US landfall would ultimately be bearish because of demand destruction outweighing supply impacts.

"The 'hardening' of refineries also limits the products shortage scenarios," Sieminski said. "Of course [the strongest] Category 5 storms could obviously be of greater concern to both oil and gas supply, but traders appear to be more convinced, at least for natural gas, that lower electricity demand generally offsets much of the supply losses."

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