Hurricane Season & How it Affects Your Energy Prices
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. So, what does that mean for energy prices? Let’s take a closer look:
At a Glance:
- Hurricane season runs from 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.
- 2020 has been the second most active storms season on record.
- September saw significant activity, with 10 named storms.
- Impacts of Hurricane Laura on August 27 included effects to US export terminals Sabine Pass & Cameron, with power outages in both terminals.
- Hurricane Delta is primed to have similar effects as we saw with Hurricane Laura.
- While energy prices aren’t as affected as they once were by an active hurricane season, the effects are still reflected in energy prices
Whether you like it or not, weather will impact your energy prices
It always comes back to supply & 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, widespread power outages can decrease demand, resulting in lower prices.
The good news…and the not so good news
Yes, there is good news! In 2005, natural gas production in the Gulf of Mexico accounted for over 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 far less impact) has reduced the potential impact of hurricanes on energy prices in the US.
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.
What to expect from Hurricane Delta?
*At the time of publication, the Category 4 hurricane will likely make landfall over the weekend, which begs the question – how will it affect the energy market? As we saw with Hurricane Laura, Hurricane Delta could put a wrench in the natural gas demand, with the potential for infrastructure damage offshore. The result is an increase in pricing as production is slowed, or in some cases brought to a halt. On the flip side of that coin however, warm temperatures coupled with a potential for widespread power outages could reduce demand, bringing prices back down.
Why do natural gas and electricity go hand-in-hand?
Did you know…that electricity is closely tied to natural gas? The general rule of thumb is that where natural gas prices go, electricity prices follow. We’ll dive into the ins and outs of that trend another time, but retail electricity prices are largely driven by natural gas prices, which are driven by several related factors, two of which include – you guessed it - weather and supply & demand. So as a hurricane season rears its ugly head, you can expect energy prices as a whole to feel the effects. The full extent is as unpredictable as the weather, but it’s our job as your energy experts to ride the wave of instability for you so that you can stay focused on your business. Ultimately, these shifts in weather patterns affect near-term prices, with less of an impact to further out terms. All the more reason to be planful when it comes to your energy contracts.
Want to learn more about what to expect from energy prices and how it may affect your bottom line in the coming months or years? Give us a call and schedule time with one of our consultants! We are happy to chat through your energy needs: 800-562-6685 OR email us at email@example.com