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Tropical Storm Debby Increases Natural Gas Prices

June 26, 2012

Debby, the first tropical storm of 2012, has shut down nearly a quarter of oil and natural gas production in the Gulf of Mexico. In doing so, present and future natural gas prices have increased. Since the storm is characterized by relatively stationary heavy rains (it was moving at about 3 miles per hour as of noon yesterday), the problems of the storm are floods and tornadoes instead of severe winds (the storm’s winds have slowed to about 45 miles per hour), especially for Florida and Alabama.

The U.S. Bureau of Safety and Environmental Enforcement estimated Sunday that 22.9 percent of oil and gas production in the Gulf of Mexico region has been shut down. The U.S. Energy Information Administration reported that production in the Gulf of Mexico accounts for 12 percent of the gas production in the U.S. This significant portion being shut down caused natural gas prices to rise yesterday when the market opened. As of 12:30 PM ET yesterday, the United States Natural Gas Fund (UNG) had increased $0.45 to $18.67 (2.47%) and Natural Gas (NYMEX) had increased $0.06 to $2.76 (2.30%). Prices are expected to increase further over the course of this week.

Natural Gas Futures also increased. As of 12:00 PM ET yesterday, the Henry Hub future prices had increased by $0.055 to $2.680 for July 2012, $0.052 to $2.720 for August 2012, and $0.046 to $2.746 for September 2012. This is also partially due to Debby, but the effects of the tropical storm are believed to be short-lived. Hotter temperatures are believed to have a more important and longer lasting effect on natural gas prices.

Just this past week, scorching temperatures, particularly in the Northeast, drove up demand (there is more air-conditioning use when it is hot out), increasing natural gas prices. This is indicated by a domestic increase in the past week and a half, the U.S. Energy Information Administration reports. Bentek, a company that does energy market analysis, estimated that from 6/13-6/20 there had been a 7.1 percent increase in natural gas consumption for power generation, thereby causing a domestic natural gas consumption increase of 2.3 percent. Most of this increase came from the Northeast, which saw record-high temperatures in the middle and latter half of last week. Prices increased greatly in this region: Boston saw an increase from $2.50 per MMBtu a week and a half ago to close at $8.87 per MMBtu on 6/20; New York saw a $1.78 per MMBtu increase over that same time period, closing at $4.11 on 6/20. If hot temperatures persist, natural gas prices are expected to rise further; if the weather cools off, prices will likely stay level.