Hurricane season a threat to US natural gas markets

The Atlantic Hurricane Season began on Sunday (1 June) and lasts till November with the most active stage tending to be between 20th August and October. Hurricane’s have the potential to seriously disrupt oil and gas production and refineries in the US Gulf region often causing sharp spikes in energy prices. This year all forecasts point towards a quiet hurricane season, while the declining importance of the US Gulf in US oil and gas output and better preparedness by companies operating in the region suggests the risk of disruption is very low. However with US gas stocks low after the cold winter, gas prices rather than oil prices are at risk of spiking higher if supply is disrupted

During the 2005 season hurricanes Katrina and Rita knocked out 113 drilling platforms, damaged more than 450 pipelines, decreased natural gas production from 1.6 trillion cubic feet per month to 1.4 cubic trillion feet per month and sent natural gas prices spiking from $6/mcf to $14.33/mcf in a month. The energy infrastructure and supply disruptions caused by the 2008 hurricanes were similar but not as severe as those caused by the 2005 hurricanes.

Although worst-day outages between both hurricane seasons were comparable, Hurricanes Katrina and Rita were more powerful and caused more lasting damage to energy infrastructure than Hurricanes Gustav and Ike. As a result, energy production and supply recovered more quickly in 2008 than in 2005. Following 2008 there has thankfully been very little in the way of disruption to either oil or gas supplies in the region. The only significant hurricane outages in 2013 (not on the chart below) came from Hurricane Karen in October which curtailed output by an average of 100,000 b/d through the month.


This year all of the major seasonal hurricane forecasts are calling for a below-average to near-average season, with 9 – 12 named storms, 3 – 6 hurricanes, and 1 – 2 major hurricanes. Since 1995 there has been an average of 15 named storms, 8 hurricanes, and 4 major hurricanes. Predicting the weather accurately is an inherently difficult task, however and it only takes one big storm to seriously disrupt production. NOAA’s predictions have been wrong for seven of the past fourteen years while Colorado State University’s forecasts have been wrong in each of the past two years. Indeed the prospect of an El Niño weather formation (thought to dampen the formation of hurricanes) may be receding suggesting that the season could be more active than originally thought.

The shale gas revolution has meant that Gulf of Mexico natural gas and oil production is less significant as a proportion of overall US output now. According to the EIA, federal Gulf of Mexico natural gas production amounted to only 6% of total domestic production in 2012 compared to 26% in 1997. Similarly, Gulf of Mexico crude oil production amounted to 19% of the total domestic production in 2012 as compared to 26% in 2007. Meanwhile, oil and gas companies appear to have learnt from the experience of Katrina and Rita as well as the recent appearance of fast developing storms to ensure that production facilities are closely monitored and personnel are able to be evacuated and able to return quickly.

However with natural gas stockpiles still about 40% off their typical average for this time of year after the Arctic winter drained supplies any disruption to gas supplies in the US Gulf could have a much larger effect on prices than normal. In contrast with US crude stocks near record levels the threat to crude prices appears to be much less.

You can keep track of the latest hurricane and the potential impact it could have on oil and gas facilities by watching the EIA’s real time interactive map (click here).

Where next for cotton prices?

Cotton futures prices peaked in early May at around 95 cents per lb, the highest level for over two years. Since then cotton futures have declined by 10 cents per lb as heavy rainfall in west Texas around Lubbock (the area typically produces a fifth of the US cotton crop) led traders to anticipate a larger harvest. According to the USDA 36% of Texas’s cotton fields have been planted, the rainfall allowing farmers to plant more cotton seeds and helping those seeds already sown to survive. The rain is especially welcome after recent harvests have been buffeted by drought. Meanwhile increased demand from China, the top cotton consumer and the US, the largest apparel market means that supplies could hit a 23 year low later in the summer, according to projections from the USDA.

The prospect of El Niño appearing later this year (the chances of it appearing put at 70% by some meteorologists) could disrupt cotton prices. The potential effects of El Niño rainfall patterns on global cotton production range from drier weather in Australia and central India and wetter weather for the US Cotton Belt. According to Societe Generale cotton prices have often jumped by more than 60% in previous episodes. Although the central issue for the US and the effect on the cotton market would be the timing of  El Niño it could be even more influential if it comes early enough to result in weak monsoon rains over India.  India plants a lot more cotton than the US and variable rainfall there can cause swings in production causing large price movements.

Another factor that has been weighing on the market is fears over an impending release from China’s cotton reserves. Some estimates suggest that as much as three million tonnes, or almost 30% of China’s strategic stockpile of cotton could be released during the 2014/15 season beginning 1 August. These fears might be overblown however after recent data showed that China had recently placed a large order of US cotton, the USDA having to play catch up in its estimate of how much China is likely to import this season.

Although demand for cotton is strong it is increasingly competing with polyester for market share among textile and clothing manufacturers. When cotton futures soared to over 200 cents per lb in early 2011 many manufacturers switched to cotton/polyester blends. With cotton now less than half that value there has been little sign that cotton consumption bouncing back. Indeed, with polyester at around 65 cents per lb in China and consumers increasingly content with cotton/polyester blends many in the market appear pessimistic that the market will return to pre-2011 consumption levels of demand.

Meanwhile, cotton merchants are waiting months to take delivery of cotton from US warehouses, tightening supplies according to reports in Reuters. Some warehouse operators have sought to release stock at the slowest possible rate when demanded in order to cash in on storage fees. In times of high demand and low supplies, like now, those rates can be too long to meet the just-in-time demands of mill who carry minimal stocks. According to Reuters major cotton users are hunkering down until next season, when fresh supplies will arrive on the market.

Cotton futures prices have followed seasonal price trends closely so far in 2014. Based on data from the last 30 years cotton prices could well continue to fall, perhaps bottoming out in July/August. Cotton prices tend to peak in the spring just as planting takes place and the risk of weather damage is greatest and then reach a trough between July and September as the crop is harvested. As in previous years the risks focus on the weather (particularly the likelihood of drought in the US, but also rainfall and flooding in India and Australia) and China’s policy towards its cotton reserve and nearer term purchases may divert prices from seasonal trends.



Policy easing delay a risk to copper prices

On the face of it the latest indications of Chinese manufacturing activity indicating somewhat of a stabilisation in activity in May should support copper prices. To recap the preliminary HSBC reading of activity in May rose to a five month high of 49.7, an improvement but still in contractionary territory. Given that the Chinese manufacturing sector is a key source of demand for copper this should, if sustained lead to higher copper demand and prices in the months ahead.


However, balancing this view is the potential for weakness in the country’s construction sector, the other main source of copper demand.  Goldman Sachs conclude that a “two year property downcycle is imminent…driving 10%-15% price cuts in most cities with 15% volume contraction from 2013 levels in 2014E-15E”. A policy response could help support the property market, maintaining support for copper and other commodities important to the construction sector. However delays in implementation could pose significant downside risks. “We believe China has the flexibility (in terms of potential policies, e.g. RRR cut, mortgage easing, removal of L/D ratio, etc.) to prevent a severe property downturn. However, we are concerned about the timing of their implementation, if any, as possible delays could lead to further slowdown in the property sector and a fall in fixed asset investment (FAI).”


Goldman Sachs forecast copper prices could sink to $6,200 per tonne by the end of the year, compared with a current price of around $6,850 per tonne.

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