Abundant Energy Supplies Ease Hurricane Season Concerns

HOUSTON (Dow Jones Newswires), May 29, 2009

Hurricane season isn't as threatening as it used to be, at least for energy markets mired in a recession.

The 2009 Atlantic Hurricane season, which officially starts on June 1 and lasts through Nov. 30, comes amid a global slump in oil and gas demand. Although well-aimed storms -- should they hit major refining center -- could still cause gasoline prices to spike, analysts say the threat to natural gas prices has softened, and crude oil prices are unlikely to move much on storm-related outages.

That's because the U.S. has come to rely less on the Gulf of Mexico's natural gas production, and crude output from the region is just a small piece of a relatively depressed global market -- representing less than 2% of worldwide demand.

The trend was already evident last year, when energy markets reacted less severely to the 2008 hurricanes than they had in previous years, said Jim Rouiller, senior energy meteorologist for the private forecasting firm Planalytics.

"I'm beginning to think the rules of the game are changing," Rouiller said. "Weather will always play a role. It is just to what degree."

The seemingly muted potential impact of storms on energy markets is a marked change from 2005 -- when hurricanes Katrina and Rita created turmoil, jolting natural gas prices at a time of tighter supplies. Natural gas prices shot to an all-time high above $15 per million British thermal units partly because those storms knocked out key gas production infrastructure.

Natural gas is currently trading at about $4 per million British thermal units, and hurricane-related spikes are unlikely due robust domestic production and swelling inventories.

Also, the region seemingly faces a more moderate storm season than last year. The National Oceanic and Atmospheric Administration predicts nine to 14 named storms, including four to seven hurricanes. In 2008, there were 16 named storms, eight of which were hurricanes.

The first tropical depression, TD One, has already appeared off U.S. East Coast, and is currently expected to dissipate over the Atlantic Ocean.

Natural gas and oil output from the U.S. Gulf virtually stopped after Hurricanes Ike and Gustav passed through last year, and some production is still off line. The U.S. Minerals Management Service reported earlier this month that 5% of oil production there, or about 58,000 barrels a day, remain off line, while 8% of the region's gas output, or 590 million cubic feet of gas per day, is still shut in. The bulk of that production is held back by pipeline outages.

Big Supply Cushion

High natural gas storage levels helped ease supply concerns through Hurricanes Ike and Gustav in 2008, said Tancred Lidderdale, an analyst with the U.S. Energy Information Administration.

After those storms, the average price of natural gas declined from an average monthly price of $8.26 per million British thermal units to $7.65 per million British thermal units in September as the recession began cutting into demand for the fuel.

"We expect inventories to be even higher this year, which should cushion the impact of hurricanes," Lidderdale said.

Stocks of natural gas stand at 2.213 trillion cubic feet -- nearly a third higher than last year and 22% above the five-year average. U.S. oil stocks are also near an 18-year high.

Since the 2005 storms, natural gas production has shifted onshore, where producers began tapping vast natural gas resources known as shales, said Tim Evans, an energy analyst with Citi Futures Perspective in New York.

"We have less of our supply at risk in the direct path of a storm," Evans said.

For instance, natural gas output from the Gulf is about 6.5 billion cubic feet per day. The Barnett Shale, a prolific onshore gas field in North Texas, produces about 4 billion cubic feet of natural gas per day and is largely credited with the fueling the recent growth in domestic natural gas production.

The U.S. Gulf of Mexico gas output represents about 11% of domestic production, compared with 2005, when it made up about 20% of U.S. production, according to the EIA. The region produces about a quarter of the U.S. domestic oil output.  

Copyright (c) 2009 Dow Jones & Company, Inc.