While some industry experts had expected traders to get back to the business of storm concerns Friday after October natural gas futures plummeted more than half a dollar Thursday on a stout 102 Bcf storage injection, those predictions proved unfounded. Even as Gulf of Mexico evacuations and shut-ins continued ahead of Hurricane Gustav, and concerns related to Tropical Storm Hanna grew, the prompt-month contract ended up dropping 10.7 cents to close at $7.943.
All energies were lower on Friday, with October crude shaving 13 cents to close at $115.46/bbl and October heating oil dropping 1.02 cents to finish at $3.1919/gal.
“Friday was kind of a head-scratcher because traders largely ignored the very real possibility of having two hurricanes entering the Gulf one after another,” said a Washington, DC-based broker. “I don’t know if traders were dismissing the storms in favor of larger economic worries. It might just be the view that we are in a bear market and these storms will be a passing event. There is also the popular theory that the rigs that were left in the Gulf following the devastating 2005 hurricane season are much more survivable.
“With the slumping economy, we are also consuming a lot less energy right now than we were during the similar time of 2005. I think we are consuming 1.6 million b/d of oil less than we were in 2005. Whatever outages we have will have less of an impact on this market due to the lack of tightness. That is the only argument I have. I haven’t seen any late-breaking model change that has Gustav swerving off into the Yucatan instead of Louisiana.”
Going forward, the broker said a break of $7.740 would rejuvenate the downtrend. On the other side, a break of $8.880 would leave the low $9 area vulnerable.
Supply analysts argue that if Gustav were to drop Gulf production to post-Hurricane Katrina levels, the market impact would be far less than it was following the infamous storm of 2005.
Prior to Katrina and Rita “Gulf of Mexico production was 10.3 Bcf/d and as of the end of May 2008 the Gulf was producing 6.7 Bcf/d. The low point of gas production following Katrina and Rita was 4.3 Bcf/d, so looking at shut-ins or damage to assets on a relative basis it will be very little,” said Tom Doremus, a managing principal with Crossbow Energy Advisors, a Connecticut energy consulting firm.
According to Doremus, instead of a 6 Bcf/d loss as in 2005 the amount of supply reduction is likely to be closer to 2 Bcf/d. “Gustav is hitting at about the same time as Katrina and Rita, but you are looking at the possibility of a lower effect on overall supply. Shale production [and other projects] are so great the industry can handle this,” he said.
“The potential for major interruptions from Gustav versus Katrina as a percentage of Gulf production as well of overall U.S. production is less.” Should Gustav take Gulf production down to 4.3 Bcf/d, “it will have half the impact of three years ago.”
Interruptions or not, Gustav’s projected course calls for a South Louisiana landfall Tuesday if National Hurricane Center (NHC) projections are correct (see related stories). There is also an outside chance that Tropical Storm Hanna may impact the Gulf. If Hanna were to continue on one course, it would hit the Georgia-South Carolina coast, but NHC projections show it arcing to the west and then the southwest by Tuesday on a path to the Bahamas. This course could imperil Florida and possibly the Gulf.
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