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How Hurricane Isaac Would Impact Natural Gas Prices

 August 31, 2012 03:49 PM

(By Mani) Hurricane Isaac moved through the Gulf of Mexico (GOM) before making landfall in Louisiana earlier this week. As a result, 95 percent of GOM oil and 72 percent of natural gas production was shut-in and had not been restarted.

While the tropical storm Isaac caused havoc along the Gulf Coast, it will also dampen the natural gas demand as the Labor Day weekend approaches.

The most impacted companies include: Apache Corp. (NYSE:APA), Anadarko Petroleum Corp. (NYSE:APC), Gulfport Energy Corp. (NASDAQ:GPOR), Murphy Oil Corp. (NYSE:MUR), McMoran Exploration Co. (NYSE: MMR) and Noble Energy, Inc. (NYSE:NBL).

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Additionally, four refineries in Louisiana were shut-in, and several more were running at reduced rates. As a result, the WTI/LLS spread has narrowed by about $4 a barrel over the last week.

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"However, we expect these upstream and downstream shut-ins to be relatively transitory in nature and don't expect much damage at this point. As a result, we expect business as usual in the Gulf to resume by early next week," RBC Capital Markets analyst Leo Mariani wrote in a note to clients.

The impact of the recent tropical storm Isaac boosts gas prices across the US. However, at this juncture, it is too early to predict about the damages it caused to production infrastructure along the Gulf Coast.

"Fundamentally, we believe prices will trend downward over the next two months, but the near-month contract will remain north of $2.50/MMBtu," UBS analyst Ronald Barone said in a client note.

Meanwhile, the storage surplus is expected to shrink fairly consistently until the start of the withdrawal season and are encouraged by the continued decline in the natural gas rig count which most recently has been pressured by the plunge in NGL (natural gas liquids) prices.

The latest Baker Hughes natural gas rig count is 486, which is down 46 percent from one year ago. This decline, combined with the increasing production decline rate associated with shale formations and increasing demand (particularly from the power generation sector), lead us to believe prices will remain well-above their lows in this cycle, despite the substantial number of completed but unconnected wells.

"At this juncture, we are maintaining our NYMEX natural gas price forecasts of $2.65/$3.75/$4.75 for 2012/2013/2014, respectively," Barone said.

The EIA reported a storage injection of 66 billion cubic feet (Bcf) as of Aug.24, a touch above the consensus injection expectation of 64 Bcf. The 66 Bcf injection compares with a 47 Bcf injection last week, a 55 Bcf injection this week last year, and the five-year average injection of 64 Bcf.

"Based on overall market dynamics so far this week, we estimate the EIA will report an injection of 65 Bcf next week. Given last year's injection of 64 Bcf and the five-year average injection of 63 Bcf for the comparable week, we project the y/y storage surplus will increase to 414 Bcf from 413 Bcf and the five-year average surplus will increase to 352 Bcf from 351 Bcf this week. Based on our injection estimate for the week ending August 31, storage would total 3,439 Bcf." Barone added.

Working gas in storage was 3,374 billion cubic feet (Bcf) as of August 24, 2012, according to EIA estimates. This represents a net increase of 66 Bcf from the previous week. Stocks were 429 Bcf higher than last year at this time and 361 Bcf above the 5-year average of 3,013 Bcf.



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