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Hurricanes and energy prices

Industry News | October 12, 2020 | By:

Editor’s note: APPI energy services are included in the membership benefit package offered by Industrial Fabrics Association International. The following information is provided by APPI.

It wouldn’t be 2020 if we weren’t facing a record-breaking hurricane season, now would it? We’ve had a particularly active hurricane season so far, with 25 named storms—a number that is well above the average of 12. What does that mean for energy prices?

At a glance:

  • Hurricane Season runs June 1–November 30, putting us on the back-half of the season, but not quite out of the woods yet.
  • For the first time since 2015, Greek names are being used for naming hurricanes.
  • ‘Wilfred’ was the earliest, 21st named storm on record.
  • So far this year, there have been 25 named storms, trumping the average season total of 12.
  • September saw significant activity, with 10 named storms.
  • While energy prices aren’t as affected as they once were by an active hurricane season, the effects are still reflected in energy prices.

Weather will impact your energy prices

It always comes back to supply and demand and weather. On the supply side, the amount of natural gas in production and the levels in storage are key factors, whereas on the demand side, weather becomes a determining factor. If demand is high from an unseasonably hot summer or cold winter, natural gas storage declines, forcing prices to rise along with production. If supply is impacted from a weather incident, then demand could increase, along with prices.

Takeaway: Hurricanes are no exception. Hurricanes can impact offshore production, as well as cause infrastructure damage, leading to less supply and higher prices. Conversely, power outages can decrease demand, resulting in lower prices

The good news … and the not so good news

In 2005, natural gas production in the Gulf of Mexico accounted for more than 20% of PJM’s supply, as compared to 2018, where only 3% of dry natural gas was produced offshore in the Federal Gulf of Mexico.

Takeaway: Hurricanes don’t have as big of an impact as they once did due to the U.S.’s reduced reliance on offshore production. On-shore production of shale natural gas in states like Ohio and Pennsylvania (where hurricanes have little to no impact) has reduced the potential impact of hurricanes on energy prices in the U.S.

The not so good news of course is that infrastructure is still at risk during an active hurricane season. Damaged infrastructure can lead to less energy. Less energy leads to less supply. Less supply yields a higher demand. And with greater demand, comes increased energy prices.

Takeaway: Hurricanes still have the potential of raising near-term energy prices due to fears of reduced output, but can also lead to lower prices due to demand destruction. For example, Hurricane Laura shut in 84% of oil and 62% of gas production in the Gulf of Mexico but left millions without power for weeks and severely damaged electricity transmission and distribution systems.

Why do natural gas and electricity go hand-in-hand?

Electricity is closely tied to natural gas. The general rule of thumb is that where natural gas prices go, electricity prices follow. Retail electricity prices are largely driven by natural gas prices, which are driven by several related factors, two of which include weather and supply and demand. So as a hurricane season rears its ugly head, you can expect energy prices as a whole to feel the effects.

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