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Living on the Edge

Putting natural-gas price volatility into hurricane-season perspective.

Fortnightly Magazine - August 2006

storage levels. Storage levels at the end of the heating season stood at 1,500 Bcf, a value more than double the previous year’s end-of-season totals. That is, although production had decreased, it was sufficient to meet demand, given available storage.

The production decline from 2001 to 2002 sent a wave through the market. Observers and participants alike began to question the ability to refill storage sufficiently during the 2002 injection season. Exacerbating the market sentiment was the prospect for strong summer cooling demand. Additionally, Canadian exports were at relative low levels, and uncertainty remained around the ability to backfill lost Canadian gas with LNG deliveries.

Natural-gas prices started to decline during the summer of 2002 as it became likely that storage would reach levels considered healthy by the end of the injection season. However, prices did not return to the year’s previous lows of around $2.50/MMBtu. Rather, the price depression halted at roughly $3.00/MMBtu. By September 2002, gas prices were again on the rise, enticed by expectations that hurricane Lili, a Category 4 storm, would disrupt gulf production on the order of 100 Bcf during September and October 2002. Lili made landfall near the central coast of Louisiana.

With uncertainties remaining about lost production and a colder than normal winter, natural-gas prices entered the 2002-2003 heating season at roughly $4.00/MMBtu. Bitterly cold weather in the Northeast caused daily spot prices at the Henry Hub to peak at roughly $19/MMBtu by late February 2003. The cold weather not only was severe but also sustained. The resulting extraordinary heating demand lasted well through March 2003. Higher world oil prices in 2004 and several hurricanes that year contributed to the sustained high prices felt throughout the 2004-2005 winter heating season. Similar things resulted during the winter months of 2005-2006, where prices were high as a result of the production losses caused by hurricanes Katrina and Rita.

Katrina was the most powerful hurricane to hit the Gulf of Mexico in the last 80 years. Shortly thereafter, Rita (also a very powerful Category 4 hurricane) made landfall. The two storms left a great deal of the production in the region shut-in for oil and gas. Leading up to and after the landfall on Aug. 29, 2005, and again on Sept. 21, 2005, respectively, prices climbed to a record high of $12.70/MMBtu on Aug. 30, 2005, and to $14.85/MMBtu on Sept. 23, 2005. Aftermath-related shut-ins continued to reduce gas production in the Gulf of Mexico.

Adding to the mix was the perception that hurricanes Katrina/Rita-related shut-ins could last longer than those of 2004’s hurricane Ivan. However, the price at the Henry Hub and a number of other markets in the Gulf Coast area declined to $8.76/MMBtu by Nov. 7, 2005. The declines were short lived. Fears of a colder-than-normal winter started to rile the market soon after. On Dec. 13, 2005, the price for natural gas at the Henry Hub reached the highest point ever seen, at $15.40/MMBtu, and remained above $14.00/MMBtu for many days.

More recently, as of March 8, 2006, the Minerals Management Service (MMS) reported