Natural Gas & Hurricanes
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Original post - 2nd Sept 2019
Posted here - 2nd Sept 2019
[Natural Gas & Hurricanes]
[In Simple Language]
Hurricane Dorian spiking NG prices has been the headline across the board all of last week. Such headlines entice traders to enter positions impulsively & also cause a speculation based chain reaction among small traders who have limited access to research & information.
This post is intended to debunk headlines which are solely meant for ad-revenues without any research & provide you with more holistic & in depth knowledge to clearly decipher the tropical storm & hurricane news going forward.
From 1990s until 2005, majority of Natural Gas production used to happen offshore [drilling in the seabed] in the Gulf of Mexico. At that time, any weather related breaking news about a tropical storm transitioning into a hurricane, used to be met with huge speculation & a massive spike in NG & Oil prices.
14 years back in 2005, Hurricane Katrina hit the Gulf of Mexico & made a landfall in Florida & Louisiana from Aug 23 - Aug 31. Natural Gas prices in anticipation of the Hurricane season & later due to Hurricane Ivan, Katrina & Rita, rose from $5 to $14 in just 3 months. Similarly in 2006, Hurricane Gustav & Ike spiked NG from $5 to $12.
Betting on Hurricane season every year had become extremely popular among hedge funds. Amaranth Advisors, a hedge fund with $9 billion in assets made enormous profits in 2005 but went bankrupt after losing $6.5 billion in Natural Gas trading in 2006. Their hurricane bets just went completely awry that year.
Q1. Katrina was a Category 5 hurricane. Why did Natural Gas not spike on the back of another CATEGORY 5 Hurricane, DORIAN ?
Figure 1 explains this. NG production has seen a drastic reduction in the Gulf of Mexico over the last 10-15 years. Only 5% of dry gas is now produced in the Gulf. The rest has moved onshore [drilling earth's surface]. So, the impact of a hurricane on NG prices is now limited. In an event a hurricane hits the production facilities, some tailwind is certainly possible. But, HURRICANES ARE NO LONGER A GAME CHANGER they used to be many years back.
Q2. If moving the offshore production facilities from the Gulf of Mexico to onshore zones was practical, why didn't it happen 10-15 years back?
The simple answer to this is the technology named Fracking. Fracking, pioneered by the US, was allowed to be licensed widely only in 2007 for large scale volumes. The technology allowed exploration of Natural gas from onshore rather than offshore oil wells. More popularly, Fracking resulted in the SHALE BOOM. The shale oil & gas boom resulted in WTI prices plummeting from $147 to $26 and NG prices nosediving from $15 to $2 in just 2 years.
Hope the data provides better perspective on how to handle trading during the hurricane season. Fundamentals in trading is all about understanding the deeper data, not the superficial headlines.