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Hurricane Season’s Effect on the U.S. Energy Market

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You might have missed it, but hurricane season officially started June 1. Tropical Storm Andrea made landfall June 6 about 10 miles south of Steinhatchee, Florida. Fortunately, Andrea did not have a significant impact on energy markets. Storm season usually peaks between mid-August to October, but it is best to be prepared whether you are a resident of an area vulnerable to hurricanes or a buyer of energy, which is vulnerable to higher prices during this time. Remember that in 2005, Hurricanes Katrina and Rita caused natural gas futures to exceed $12/MMBtu for the first time ever.

One significant change since 2005 is the development of shale gas. Per the U.S. Energy Information Administration (EIA), the amount of the U.S. gas supply produced in the federal Gulf of Mexico region fell from 26% in 1997 to 6% in 2012. This change is due to onshore extraction of shale gas reserves. And the result is that the amount of offshore supply that is vulnerable to interruption by hurricanes is much lower.

I suggest reading an article by the EIA about potential storm impacts. Other key takeaways are that regardless of the total number of storms, it is the strength and trajectory of individual storms that matter most. Interruptions of offshore gas production and power outages along the Atlantic Coast have the opposite impact on energy prices due to contrasting impacts on supply and demand.

So be prepared for energy prices to react to hurricane forecasts. The reaction might not be the same as 5-10 years ago, but it only takes one strong storm in the heart of the production area to have a significant price impact.

Posted: June 13, 2013