Bulging U.S. oil and natural gas inventories should protect consumers from price spikes this summer even if the U.S. Gulf Coast gets slammed with a monster hurricane season, as forecasters have predicted.
Oil and gas prices rose last week after the U.S. government forecast up to 14 hurricanes, second only to a record 15 storms in 2005. Then, Hurricanes Katrina and Rita shut offshore oil platforms for weeks and some refineries for months.
Analysts say high U.S. inventories and industry preparation should temper energy price swings even if storm-related disruptions to oil and natural gas facilities on the level of those seen in 2005 and 2008 would cut the supply overhang.
"From a supply stand-point, we're probably better prepared for an active hurricane season than we have been in the last 20 years," said Phil Flynn, analyst with PFGBest Research in Chicago.
The surplus in inventory has already decreased the "hurricane premium" in the market, Flynn said, estimating that without high inventories, crude, product and natural gas prices would all be slightly higher.
Based on Reuters calculations, a repeat of the outages seen during 2005 in the wake of Hurricanes Katrina and Rita would send crude inventories from around 11 percent above the five-year average to about 22 percent below the norm. It would send natural gas inventories from about 15 percent over the five-year average to about 12 percent below.
A series of disruptions closer to those seen after Ike and Gustav in 2008 would bring oil inventories to about 5 percent below the five-year norm, according to Reuters calculations.
The 2010 Atlantic storm season may be the most intense since 2005, when disruptions to energy operations along the Gulf of Mexico sent fuel prices soaring, according to the National Oceanic and Atmospheric Administration.
"If we were to see a season that was every bit as bad as 2005 when we lost production and basically continued losing production into the fall, then that would mean that existing inventory levels are not terribly onerous," said Peter Beutel, president of Cameron Hanover in New Canaan, Conn.
Still, analysts say a repeat of those outages is unlikely due to shifts in supply dynamics, increased industry preparations and strong inventories.
The energy production landscape has shifted in recent years. A greater percentage to onshore sources and better industry preparations should soften the impact of hurricanes, experts said.
Ample inventories of crude oil and refined products, which swelled as the recession battered demand, will also provide a cushion in case of disruptions and help temper price spikes.
The hurricane season runs from June 1 through Nov. 30 and often affects the Gulf of Mexico, home to about a quarter of U.S. oil production, a tenth of natural gas production, and 40 percent of U.S. refinery capacity.
"The stocks will come in handy in the event of severe disruptions. They will likely prevent shortfalls in retail supply... (and) would presumably go a long way to cleaning up the overhang," said Antoine Halff, first vice-president of research, Newedge Group, New York.
A sharp increase in energy supply from onshore sources, especially in the case of natural gas, will curb the impact of hurricanes hitting Gulf of Mexico production areas.
"Back in 2005, we weren't really producing gas from shale at nearly the level that we are now. There's been complete boom in onshore natural gas production since 2005," said Addison Armstrong, director of market research at Tradition Energy in Stamford, Conn.
The rise of synthetic Canadian crude supplies, especially to the U.S. Midwest, has also changed the U.S. crude oil supply landscape, and resulted in a sharp increase in stockpiles at the Cushing, Oklahoma NYMEX delivery point this year.
The industry has also become more nimble and prepared since 2005. Refiners' increased ability to weather storms was apparent in 2008, when Gustav and Ike shut Gulf Coast refineries only briefly and resulted in far less product lost.
Hurricanes Katrina and Rita shut some refineries for months and resulted in a steep product loss of about 142 million barrels by the end of the year.
"Since Katrina, many refineries have become much more adept at managing hurricane risks... refineries have learned the lessons of Katrina," Halff said.
Still, storms may hit a larger overall portion of the U.S. refining sector as more capacity is concentrated on the Gulf Coast after economic shutdowns on the East and West Coasts.
"We have a few more eggs in one basket," Halff said.
However, the amount of crude, natural gas, and product inventories could prove irrelevant if a significant amount of energy demand is knocked out by severe storms.
"A hurricane could disrupt industrial activity and power generation in the south, throwing a stronger punch to demand than to supply," said Biliana Pehlivanova, commodities analyst at Barclays Capital in New York.
In addition, experts cautioned that large inventories and a more diverse supply of energy products would help little a storm had a heavy impact on the power supply.
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