March 29—After 15 hurricanes in 2005 and 9 hurricanes in 2004, all eyes are focused on what to expect this year. Similar to 2005 activity levels, Colorado State University has predicted 17 named storms, nine hurricanes, and five intense hurricanes for 2006. More important to the natural gas market, there is a 47 percent chance of at least one major (category 3-5) hurricane making landfall from the Florida Panhandle westward to Brownsville, Texas (a major production area). As we learned from Hurricanes Ivan (2004), Katrina (2005) and Rita (2005), natural gas prices can become extremely volatile when strong hurricanes disrupt supply in the Gulf of Mexico. The NYMEX prompt futures contract traded a record high of $15.78/MMBtu in December 2005, primarily due to shut-in production caused by Katrina and Rita. Fortunately, the United States had an extraordinarily warm 2005-2006 winter plus high levels of natural gas in storage, which prevented a serious supply crunch. The threat and/or reality of a major hurricane disrupting production is an annual occurrence, and it is one compelling reason why the term "fear premium" is used when describing the price premium the natural gas consumer must pay to hedge their winter gas costs. For example, the NYMEX winter strip (Nov. 2005-March 2006) as of March 28 settled at $10.499/MMBtu, which is $2.937 or 38 percent higher than the NYMEX June futures contract. Is it worth paying that premium? It's possible, if there are hurricane-driven supply disruptions.

Jerry Dalton, senior price risk manager, can be contacted by e-mail at jdalton@usenergyservices.com.