Traders Are Betting Hurricane Harvey Will Curb Power Use

(Bloomberg) -- Hurricane Harvey is forcing natural gas drilling platforms to evacuate and pipelines to shut, curbing supplies of the power-plant fuel across the Gulf Coast. So why aren’t electricity and gas prices skyrocketing?

Because Harvey, set to slam into Texas as the worst hurricane the region has seen in a decade, will also sap power and gas demand as people evacuate and temperatures drop. Gas use in East Texas may fall about 8 percent this weekend, according to energy data provider Genscape Inc. And the state’s power demand may tumble 27 percent on Saturday from a week earlier, forecasts from the the region’s grid operator show.

“The market is not stupid -- it knows that we are going to lose demand this weekend,” said Alex Elsik, chief executive officer of Houston-based hedge fund Geosol Capital LLC. “Those types of things more than offset the small amount of supplies that are shut off.”

Gas futures fell 5.7 cents to settle Friday at $2.892 per million British thermal units in New York. Spot on-peak power for Texas dropped 29 percent to $21.85 a megawatt-hour as of 1 p.m. local time, grid data compiled by Bloomberg show.

The plunge underscores the dramatic shift the U.S. gas market has undergone in the past decade. In 2005, when gas extracted from the Gulf of Mexico accounted for 20 percent of total U.S. production, prices for the fuel surged to a record in the wake of hurricanes Katrina and Rita. As gas output climbs amid abundant supplies from onshore shale reservoirs, the Gulf’s share has tumbled to 4 percent.

And that has meant storms can actually send gas and power prices sliding as electricity outages, falling temperatures and disruptions to gas exports cut demand.

Force Majeures

Freeport LNG, a project in Quintana, Texas, that’s planned to liquefy gas and export it abroad, has evacuated workers. The town of Quintana initiated a mandatory evacuation plan Thursday. Major gas pipeline operators including Kinder Morgan Inc. and Enbridge Inc. have also started evacuating employees, and in Kinder’s case, declaring force majeures.

Any prolonged outages in the Gulf could start boosting gas prices, said Het Shah, an analyst at Bloomberg New Energy Finance in New York. The region may lose as much as 750 million cubic feet a day of gas, or 24 percent of total supply, he said.

“Demand outage is due to flooding and winds -- it’s temporary,” Shah said. But how long production outages could last “is an unknown,” he said.

Meanwhile, the market’s dealing with another bearish signal: There is no sign of above-normal temperatures until next week, Chris Coleman, senior meteorologist at the Electric Reliability Council of Texas, said in a statement. For now, the grid operator is worried about Harvey, which it says could produce winds greater than 110 miles per hour and generate as much as 15 to 25 inches of rainfall as it lingers above Texas.

"The big story is Tropical Storm Harvey, which will impact Texas for an extended period, resulting in a major flooding scenario," Coleman said.

Other businesses affected in Texas:

• Bloomberg New Energy Finance estimates net natural gas demand drop will be as much as 1,300 million cubic feet a day in Aug. 28.
• Gulf of Mexico operators have shut in 23 percent of gas production and 22 percent of oil output, according to a Bureau of Safety and Environmental Enforcement statement.
• ConocoPhillips, EOG Resources Inc. suspended drilling at Eagle Ford sites in Texas.
• Cheniere Energy Inc. shut its Houston office for Friday and Monday, evacuated Corpus Christi construction site and will have only essential personnel at its Sabine Pass export terminal in Louisiana starting Friday evening; gas supply and trading unit activated emergency protocols and will ensure gas flows and contraction obligations needed for Sabine Pass are met.
• POWER, GAS STORM WRAP: 700 MMcf/D Gas Output Offline, Pipes Shut

To contact the reporters on this story: Ryan Collins in Houston at rcollins74@bloomberg.net, Naureen S. Malik in New York at nmalik28@bloomberg.net.

To contact the editors responsible for this story: Lynn Doan at ldoan6@bloomberg.net, Jim Efstathiou Jr., Steven Frank