Its well known that natural gas is a seasonal trader. Demand for natural gas is higher in hot summer weather where consumers crank up their air conditioners and in the winter when consumers crank up their heaters to stay warm. Prices can be effected up or down depending on whether temperatures – especially in northeast US – are extreme or moderate.
The other weather wild card is the hurricane season. Hurricane activity is highest in late summer when the difference between temperatures aloft and sea surface are the greatest. As tropical storms move across the Gulf of Mexico they grow in strength fed by the warm waters of the Gulf and often reach hurricane strength. Hurricanes often will not lose strength until they have come ashore and moved inland where the cooler temperatures of the land remove the fueling effects of the warm Gulf waters. As we know the impact of hurricanes on coastal communities are devastating. Amoung the loss of human life, homes, infrastructure, power, etc. is the potential disruption of natural gas supplies from the Gulf of Mexico – home to ~11% of US domestic natural gas production.
Case in point was in 2007 when Hurricane Katrina and Hurricance Rita. The combination of these two hurricanes had an extraordinary impact on the offshore oil and gas industry in the Gulf of Mexico. The Minerals Management Service (“MMS”) estimated that 3050 of the 4000 platforms in the Gulf and 22,000 of the 33,000 miles of pipelines were in the direct path of either
Hurricane Katrina or Hurricane Rita. Fortunately, there were no oil spills or loss of life but the impact was the shut in of 100% of oil production during both storms and ~95% of natural gas production shut in during Katrina.
Such a major forced shut in of natural gas production from the Gulf during a time of higher demand was a major contributor of sending natural gas $14.50. It is also where many energy speculators like natural gas advocate T. Boone Pickens made a fortune by betting on higher natural gas prices due to an active and disruptive hurricane season reports (predictions). Today, this is not a bet that T. Boone Pickens or any other gas trader would likely make as the hurricane season has been a non-event. (Thankfully. The Gulf has had enough disasters and could use all the breaks they can get).
Those on the buy side of natural gas are buyers simply because they believe natural gas is under-valued or perhaps they have been caught in a short squeeze and are covering (not many but a few).
There is of course always the possibility that a hurricane does form. Today, the National Hurricane Center announced that Tropical Storm Fiona had formed east of the Leeward Islands. Initial projections show Fiona heading toward the East Coast. However, even if Fiona did materialize it is uncertain if this hurricane would have the strength of Katrina, or if it did would a short term disruption of 95% of the natural gas production have the same impact on prices given the comparative lower industrial demand, and the increased production from shale gas basins across North America. Demand and production were much different in 2007.
But though increased onshore gas production from shale formations around North America have contributed to lower prices for most of 2010, the US Energy Information Administration recently reported that production from the 48 states decreased by 1.2% between May and June to ~64.3 billion cubic feet per day. This has been reflected in the lower then average weekly injections into the US natural gas supply in storage.
In the meantime, we remain in a period of higher supply and lower demand. And the opportunity, to take advantage of increased natural gas reserves as a lower carbon energy source making up for a larger part of the overall energy mix is still there.