How Will Hurricane Season Affect Energy Prices?

Hurricanes have historically played a large part in determining natural gas prices between June 1 and Nov. 30. How will hurricanes affect prices this season?

May 29, 2014 at 8:49AM


Source: Wikipedia 

Hurricanes are among the most destructive forces known to man. 

During its life cycle, the average hurricane can release as much energy as 10,000 nuclear bombs.

Because of its destructive potential, a hurricane can wreak havoc on energy infrastructure and influence energy prices. Hurricanes Katrina and Rita, for example, knocked out 113 drilling platforms, damaged more than 450 pipelines, decreased natural gas production from 1.6 trillion cubic feet per month to 1.4 cubic trillion feet, and sent natural gas prices spiking from $6/mcf to $14.33/mcf in a month. 

Hurricanes can also affect energy producer share prices. Shares of natural gas producers such as Chesapeake Energy (NYSE:CHK), EQT Corp. (NYSE:EQT), and Range Resources (NYSE:RRC) all rallied strongly during the 2005 hurricane season. Chesapeake Energy stock, for example, nearly doubled, rallying from $20.79 on June 1, 2005 to an eventual peak of $40.20 in early October 2005. 

With hurricane season due to begin June 1, how will this hurricane season affect energy prices?

Quiet season
So far, most meteorologists expect a relatively quiet season. The average season typically sees six hurricanes form each year, and most forecasters predict that we will see less than that.

The federal government's National Oceanic and Atmospheric Administration (NOAA), for example, predicts that there will be between three and six hurricanes this season. Private producers agree - AccuWeather believes there will be five hurricanes, while The Weather Channel and Colorado State University each believe there will be three.

Predicting the weather accurately is an inherently difficult task, however. Many past forecasts have been wrong. NOAA's predictions have been wrong for seven of the past fourteen years while Colorado State University's forecasts have been wrong in each of the past two years.  

The bottom line
However many hurricanes there may be this season, natural gas prices may not be affected that much. This is because Gulf of Mexico production of natural gas is no longer what it used to be.

Because of the shale revolution, inland natural gas production has taken off, making Gulf of Mexico natural gas production much less meaningful. According to the Energy Information Administration, federal Gulf of Mexico natural gas production amounted to only 6% of total domestic production in 2012; this was compared to 26% in 1997. Similarly, Gulf of Mexico crude oil production amounted to 19% of the total domestic production in 2012 as compared to 26% in 2007.

As the Gulf of Mexico no longer contributes a meaningful percentage of total production, this hurricane season is unlikely to change the fortunes of Chesapeake Energy, EQT Corp, or Range Resources. Unless a major hurricane makes its way inland, hurricanes are unlikely to send natural gas prices spiking or share prices of gas producers higher.

It's not as if the natural gas producers need the help; shares of Chesapeake Energy, EQT Corp, and Range Resources have all hit 52-week highs in the past month and will likely continue to do well as the producers ride the trend of greater profits and better investor sentiment.

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