Hurricane Fears Can Bloat Natural Gas Premiums

By Cordier, James; Gross, Michael | Futures (Cedar Falls, IA), September 2010 | Go to article overview

Hurricane Fears Can Bloat Natural Gas Premiums


Cordier, James, Gross, Michael, Futures (Cedar Falls, IA)


Once the weather turns warm up north, attention of weathermen and natural gas traders turns to hurricane season. That only intensifies as kids head back to school in September. In fact, according to the National Oceanic and Atmospheric Administration, the maximum hurricane activity is in early to mid September.

In Florida, the media is already in panic mode. The national financial media's seasonal theme is that hurricanes will wreak havoc on Gulf oil and natural gas rigs. As the United States gets much of its domestic production of natural gas from Gulf rigs, who knows how high prices could go?

It seems pretty simple: buy natural gas in the summer and fall, wait for the hurricanes and get huge profits. But alas, expecting the spectacular is seldom a wise investment decision.

Had you followed this strategy for the past decade, chances are you would not have fared well. Gulf storms that do enough damage to rigs to significantly disrupt production are extremely rare. Hurricane Katrina and to a lesser extent, Rita, were exceptions. Granted, they can happen and their possibility should not be discounted. However, banking on them to happen is more like playing roulette.

The media hype surrounding hurricane season brings out the public to trade natural gas. And the public's favorite tool for trading volatile markets is buying options.

Natural gas prices have continued to flounder for most of the year due to hefty supply. New discoveries in Texas and Pennsylvania have opened the door to long-term future supplies, changing the big picture supply dynamic for natural gas.

At 2.891 billion cubic feet in storage, natural gas supplies remain near historic highs for this time of year (see "Plenty of breathing room"), which will be the prevailing headwind the bulls will have to overcome. Total storage levels remain nearly 10% above rhe five-year average for this time of year.

But the bulls do have a few bullets to use. A late July Energy Information Administration report showed a 10% jump in natural gas used for electric power. Overall U.S. natural gas demand was up 4%. Both of these figures were most likely the result of the heat wave that swept much of the nation in July.

Tropical Storm Bonnie, the First storm of the season, threatened Gulf natural gas rigs but was quickly a non-event. …

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