Questioning whether the natural gas market is currently in a “doom & gloom” or “demand boom” period, Raymond James analyst J. Marshall Adkins said one year after Hurricane Katrina’s devastation there should be a “substantial” year-over-year natural gas demand increase.
Noting that the natural gas market volatility over the past 60 days was attributable to the blistering heat found in regions across the country, Adkins, in Raymond James’ latest “Stat of the Week”, said that with the extreme heat now gone, the market is locked in on storm activity in the tropics as its main driver.
“While the majority energy investors believe that a hurricane-related supply curtailment is necessary to meaningfully decrease the current 291 Bcf of year-over-year natural gas surplus in storage, we believe that the [year-over-year] gas storage surplus will continue to shrink, regardless of hurricane activity,” Adkins said in the report. “The reason for our optimism is that the stock market continues to underestimate the amount of posthurricane demand destruction that took place after Sept. 8 of last year.”
With Katrina’s one-year landfall anniversary on Tuesday, Adkins said hurricane data from 2005 could be key to sorting the natural gas demand situation this year. Noting that the 2005 hurricanes knocked out nearly 6 Bcf/d of gas supply for two months (September/October) of 2005, and that prior to the hurricanes hitting, weekly gas storage data indicated the gas market was about 2 Bcf/d tighter than the 2004 summer, the Raymond James analyst surmised that if 6 Bcf/d of lost supply were the only change, then year-over-year storage data should have shown the market to be 8 Bcf/d tighter than last September/October.
“Instead, storage injections suggested the market became 2 Bcf/d looser (post-Katrina),” Adkins said. “That would imply that some 9-10 Bcf/d of gas demand was destroyed relative to last year (due to both infrastructure damage and higher prices). Quite simply put, we believe demand destruction post Hurricane Katrina far outpaced supply destruction.”
Factoring in this data along with Department of Energy statistics, Adkins estimated that between 5 Bcf/d and 10 Bcf/d of demand that was lost during September/October 2005 should re-emerge in September/October of 2006.
Erring on the side of caution and assuming that 7 Bcf/d of lost demand will return this September/October, Adkins said that “accounts for approximately 420 Bcf of lost demand over those two months, and represents the single largest factor driving our summer-ending natural gas [storage] forecast of 3.34 Tcf — far more bullish vs. current consensus expectations in the 3.6 to 3.7 Tcf range.
“Given that the stock market is currently pricing an ending gas storage in the 3.6 [Tcf] to 3.7 Tcf range, the energy stocks should be setting up for a bullish psychological shift over the next two months. More importantly, we believe this shift occurs with or without any new hurricanes this year,” he said.
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