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Hurricane impact on natural gas could lessen amid evolving US production landscape

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Hurricane impact on natural gas could lessen amid evolving US production landscape

A long-standing belief, held by many, has been that tropical disturbances, especially hurricanes, in the Gulf of Mexico provide a boost to natural gas prices as both onshore, and primarily offshore, production is affected by the storm's destruction, resulting in tight supply.

Although that sentiment has valid points, the supply dynamic in the US has begun to shift, with production no longer as centralized as in years past, with more gas being produced in the Northeast, among other regions, and less gas coming from offshore Louisiana.

In addition to the evolving supply landscape, the location where storms make their landfall is a key component to how production and prices are influenced.

With the 2018 hurricane season officially set to start June 1, we will take a look at these dynamics and how they could soften the gas impact of tropical weather events.

Katrina had major impact on offshore production

Hurricane Katrina, a Category 3 storm, made landfall in Louisiana August 26, 2005, affecting major offshore production areas in the Southeast, which caused output levels to plummet.

Total Southeast production averaged 7.53 Bcf/d in the 15 days following Katrina's landfall, down 43.2% from the 13.26 Bcf/d averaged in the 15 days prior to the storm. Offshore production accounted for 5.15 Bcf/d of that drop.

With the steep drop in Southeast output, total US production plunged more than 12% after Katrina's impact, dropping from a 15-day average of 49.75 Bcf/d prior to landfall to averaging 43.7 Bcf/d after landfall through October 31, 2005, with US production failing to even reach the 49.75 Bcf day-on-day level again until May 31, 2006.

The production drop led to the NYMEX front-month natural gas futures contract to surge more than 20% just two trading sessions after the storm's landfall, climbing to $11.76/MMBtu August 30 -- the highest point the front-month contract had reached since S&P Global Platts started publishing the front-month contract in 1998 -- from $9.79/MMBtu August 26. Elevated pricing continued for the next several months.

Harvey's landfall limited impact on production

In contrast, Hurricane Harvey made landfall as a Category 4 storm August 25, 2017 along the Texas coast, avoiding many of the major production areas in the Gulf of Mexico, resulting in only an about 600 MMcf/d decrease to production in Texas and the Southeast.

The immediate impact of Harvey's landfall was a 3% decrease in the NYMEX front-month contract price, then a brief increase that receded back to pre-landfall levels just a week later.

While Harvey missed the bulk of Southeast production, a storm that moves right up the gut of offshore Louisiana would have a significant impact on offshore facilities. But the production picture across the US is demonstrably different. The key point to note as we approach hurricane season is that this increased "shale optionality" -- the ability of gas to move from basin to basin more fluidly -- will likely eliminate significant price movements.

If a hurricane had the same impact as Katrina, which cut Southeast production 43.2%, total US output would only fall 6.4%, nearly half of the impact seen more than 12 years ago. Northeast production, which was only in its infancy in 2005 averaging 1.8 Bcf/d that year, has since become a juggernaut, averaging 26.9 Bcf/d so far in 2018.

Even with Katrina-level impact, it would be impossible for a storm to knock off 5.15 Bcf/d of offshore Southeast production, as gas production in the region primarily has moved onshore, with offshore production only averaging 2.67 Bcf/d so far this year, S&P Global Platts Analytics data showed.

Hurricanes will continue to be a destructive and disruptive force in the Southeast gas production landscape, but their impact will likely be felt on a more localized and point-specific level and not with the national ramifications they once had.

The 2018 Atlantic Hurricane outlook from the National Oceanic and Atmospheric Administration calls for a 75% chance of a near- or above-normal hurricane season, with a 70% likelihood of 10-16 named storms, five to nine hurricanes and one to four major hurricanes.

An average hurricane season produces 12 named storms, six hurricanes and three major hurricanes, NOAA data showed.