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Prices Flying High as Hurricane Path Looks More Threatening
Both the cash and futures markets skyrocketed Tuesday due to the rapid transition of Gustav from tropical storm to hurricane and, more important, the fact that its most likely projected tracking was looking much more ominous for Gulf of Mexico (GOM) production infrastructure.
As of Monday afternoon the National Hurricane Center (NHC) had been expecting Tropical Storm Gustav to traverse much of the length of Cuba, which would have greatly weakened the storm. But Gustav had strengthened to a Category One hurricane early Tuesday, and NHC’s “five-day cone” of projected tracking had the storm remaining off the southern coast of Cuba, which would allow it to continue strengthening as it was doing Tuesday morning. However, although maximum sustained winds increased to nearly 90 mph in the morning, that afternoon they fell back to about 75 mph — barely above the 74 mph threshold for hurricane ranking — as the storm passed over southwestern Haiti.
Cash quotes rose by double-digit amounts at all but five Rockies points, which saw losses of about a nickel to as much as about 40 cents. Gains ranged from about 20 cents in San Juan Basin to about 85 cents at the Florida citygate, where Florida Gas Transmission both extended an Overage Alert Day into its sixth straight day and tightened its imbalance tolerance (see Transportation Notes). Other than tending to be smallest in the West, the increases were distributed fairly evenly among various market areas.
NHC’s expected path had Gustav crossing the western tip of Cuba around Saturday evening before emerging into the southeastern corner of the GOM either late Saturday or early Sunday. At that point it would be aimed straight into the heart of oil and gas operations offshore Louisiana and Texas.
The bullish hurricane news spurred traders to push September natural gas futures, which expire Wednesday, to a daily gain of 45.3 cents.
Shortly after 9 a.m. CDT a Gulf Coast source said Henry Hub had last traded at $8.12, up about half a dollar from Monday (it eventually averaged about a dime less). She also said Carthage, which had averaged $7.26 Monday, was up to the mid $7.70s.
September basis was weakening due to the futures run-up, the source said. She noted that Henry Hub was priced at $8.33 for September Tuesday morning, which was well above current spot pricing but about 90 cents less than the August Hub index of $9.22.
One factor limiting western gains and causing some Rockies losses was high linepack on El Paso, which prompted the pipeline to say it had set the probability of declaring a Strained Operating Condition or Critical Operating Condition to high. Also, cooling load was shrinking in the Rockies, as Denver was expected to go from a Tuesday high in the low 90s to one in the low 80s Wednesday. However, western numbers got some support from peak interior California temperatures, which are due to start joining the desert Southwest in the 100s Wednesday.
Sources agreed that Gustav was the chief instigator of Tuesday’s overall rally, although some credit was also given to Monday’s screen recovery from a sharp loss to nearly flat. Overall cooling load is staying on the light side, as mild weather in northern market areas is being joined by decidedly subpar temperatures for late August in the eastern South. That area was continuing to get a lot of cooling rains from the remnants of Tropical Depression Fay Tuesday.
At 5 p.m. EDT the center of Gustav was about 60 miles west-southwest of Port-au-Prince, Haiti, and about 180 miles southeast of Guantanamo, Cuba, NHC said. The storm was moving toward the northwest at nearly 10 mph. That motion was expected to continue along with a decrease in forward speed Tuesday night, with a turn toward the west-northwest likely Wednesday, NHC said. That would put it near eastern Cuba Wednesday, the agency added.
Shell said it was making logistical arrangements to evacuate offshore workers who are not essential to production or drilling operations, and the evacuations likely could begin Wednesday. There was no impact on production as of Tuesday morning, it added.
A Canadian producer said some might call it “storm hype,” but the consensus is that Gustav will pass relatively unscathed through the Yucatan Channel between Mexico and Cuba and may get into the GOM as a Category Three or stronger storm heading for landfall between Houston and New Orleans. However, a couple of models have it heading toward South Texas, as Hurricane Dolly did, he said. The people in South Texas might not like it if that happens, but it would mean less overall threat to offshore production, he said.
The producer said it surprised him that the “hype” didn’t cause prices to jump any higher than they did.
He agreed that the storm was pushing bidweek numbers higher. He reported the Southern California border averaging in the mid $7.20s for September Tuesday out of a $7.15-7.32 range. The prices “kind of jumped around with the screen,” he said.
However, Opal was averaging a miserly $1.70 because of the extended REX outage during September (see Daily GPI, Aug. 26), he added. That will back up an estimated 600-800 MMcf/d into the Rockies for nearly all month, he said, and it’s a certainty that there will be significant shut-ins. “Some producers have to step up to the plate” and absorb the extra supplies, he said.
REX’s sponsors should have tested the affected segment properly while they were still in the construction phase, the producer commented. And you can bet there will be some real outrage if REX finds a problem that extends the outage beyond Sept. 26, he added.
The National Weather Service’s (NWS) six- to 10-day forecast for the Sept. 1-5 period calls for above-normal temperatures in the entire Midwest; from the western edge of New England through Virginia, most of Tennessee and northern Arkansas; and in the Plains from the northeast corner of Oklahoma through the eastern edge of Montana. Below-normal readings are predicted along the Gulf Coast from southeast Texas through the Florida peninsula; and from the Pacific Northwest through nearly all of the desert Southwest, including the northern third of California and a sliver along the Golden State’s eastern border.
Lehman Brothers analysts expect a storage build of 85 Bcf to be reported for the week ending Aug. 22.
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