Released on June 7, 2006
(Next Release on June 14, 2006)

The Calm Before the Storm(s)
In the midst of early June weather, as schools close, swimming pools open, and many people finalize their vacation plans for the summer, hurricanes and tropical storms may seem like a distant threat. But though the most severe storms tend to strike in the late summer or early fall, as Katrina, Rita, and Wilma did last year, hurricane season technically begins on June 1, and runs through the end of November. So, long before Tropical Storm Alberto (which will be the first name used this year) forms in the Atlantic Ocean, Caribbean Sea, or Gulf of Mexico, analysts in both the public and private sectors have been working on forecasts, potential impacts, and contingency plans for this year’s hurricane season.

Along with yesterday’s (June 6) monthly update to the Short-Term Energy Outlook, EIA released a report entitled The Impact of Tropical Cyclones on Gulf of Mexico Crude Oil and Natural Gas Production. This report examines the historical impacts of tropical cyclones (including tropical depressions, tropical storms, and hurricanes) on Gulf of Mexico crude oil and natural gas production over the period 1960 through 2005, and on refinery operations over the past 20 years. Then, using the seasonal hurricane forecast published by the National Oceanic and Atmospheric Administration (NOAA) in May 2006, together with an estimated historical relationship between tropical cyclones and production impacts, EIA generates possible ranges for total shut-in production during 2006. The report emphasizes the uncertainty of any forecast of shut-in production, due in part to the difficulty of predicting whether Atlantic tropical cyclones will enter the Gulf of Mexico and threaten the oil and gas producing region, as well as to the extent of their potential damage.

In May of each year, the National Oceanic and Atmospheric Administration (NOAA) produces an outlook for the upcoming hurricane season in the Atlantic basin, which includes the Caribbean Sea and the Gulf of Mexico. As the season progresses, NOAA fine-tunes its projections. Those projections are driven primarily by their forecasts of the seasonal Accumulated Cyclone Energy (ACE) index, which measures the collective intensity and duration of all tropical named storms and hurricanes in the Atlantic. For 2006, NOAA currently expects the seasonal Atlantic ACE index to range from 118 to 179 (135 percent to 205 percent of the normal level), corresponding to an 80 percent chance of an above-normal hurricane season in 2006. Although that forecast predicts a very active hurricane season, it is considerably lower than the Atlantic activity observed last year, which had an ACE index about 280 percent of the normal level. In addition to the ACE projections, for the 2006 north Atlantic hurricane season, NOAA predicts 13 to16 named tropical cyclones, with 8 to10 becoming hurricanes, of which 4 to 6 could become major hurricanes (Category 3 or higher).

The Gulf of Mexico region is an important source for U.S. production of crude oil and natural gas. In 2004, crude oil production from the Federally-administered Gulf of Mexico Outer Continental Shelf (OCS) fields was about 27 percent of U.S. total production, and Gulf natural gas production was about 20 percent of the U.S. total. The Gulf Coast States of Alabama, Louisiana, Mississippi, and Texas also contribute significant onshore and State-administered offshore oil and natural gas production. The Gulf is also an important refining center, with the Gulf Coast States accounting for over 46 percent of U.S. total crude oil distillation capacity.

Seasonal hurricane-related disruptions to oil and natural gas production are difficult to predict, primarily due to the uncertainty involved in predicting the location and intensity of future tropical cyclones. However, an analysis of historical impacts provides some insight into the range of potential effects given a seasonal hurricane forecast. EIA has developed two models using the NOAA seasonal Atlantic predictions to form expectations of the range of annual crude oil and natural gas shut-in production. The first model is based on the forecast Atlantic basin ACE index, while the second model uses the predicted number of Atlantic tropical cyclones. The equations are estimated based on seasonal tropical cyclone activity and Gulf OCS production records from 1960 through 2005. Those two models allow us to produce an estimate of the expected Gulf ACE and an estimate of expected impact on crude oil and natural gas production from the NOAA Atlantic ACE forecast range. However, and perhaps more importantly, those estimates are not official forecasts, but instead only analysis intended to help us better understand the correlation between hurricane activity and shut-in production.

Based on NOAA’s May 2006 projections for the 2006 hurricane season and the historical relationship between tropical storm activity and production disruptions between 1960 and 2005, total reductions in crude oil and natural gas production from the Gulf of Mexico OCS due to tropical storm activity in 2006 are expected to range from 0 to 35 million barrels and 0 to 206 billion cubic feet, respectively. NOAA emphasizes that its May hurricane outlook is based on climatological conditions that are still evolving. An updated hurricane outlook will be issued in August, when conditions favorable for hurricanes are more predictable. There is a possibility that NOAA could substantially revise its projections for seasonal hurricane activity, as in 2005, when the May outlook, projecting hurricane activity for 2005 somewhat lower than what is currently projected for 2006, was revised upward substantially in August, prior to Hurricane Katrina. Actual storm activity in 2005 then ended up close to the upper bound of the revised range. If a similar situation occurs in 2006, EIA estimates of shut-in crude oil and natural gas production due to tropical storm activity would be significantly higher.

There is no long-term data source that tracks the impact of hurricanes and tropical storms on the refinery sector. Refinery utilization rates are generally affected by overall capacity availability relative to demand, forced outages, and seasonal maintenance and product turnaround cycles, as well as by hurricanes. Despite the inherent difficulty of isolating the effect of storms on refineries, EIA has developed a simple index of normalized capacity utilization for refineries in the Petroleum Administration for Defense District (PADD) 3, which encompasses the Gulf Coast. The figure below displays the monthly normalized index (monthly utilization rate divided by the average January-through-June utilization rate) for PADD 3 refinery capacity for the months of July through October, when disruptions related to tropical storms and hurricanes are most likely to occur. The index highlights the uniqueness of the refinery damage experienced in 2005. The vast difference between refinery damages due to Hurricane Ivan in 2004 and Hurricanes Katrina and Rita in 2005 highlights the importance the path of the storm can have on the impact to refineries.

Although the memories of Hurricanes Katrina and Rita last fall are still fresh, it’s important to recognize that those storms were each very unusual in terms of their impact on the oil and gas industries, and even more so because they occurred only a month apart. Also, NOAA forecasts Atlantic tropical cyclone activity, but does not attempt to predict how many of those storms will reach the Gulf of Mexico, much less where exactly they might strike the coastline. Furthermore, EIA’s estimates of potential impacts on oil and gas production are based on statistical relationships from historical data, including last year’s record shut-ins. So U.S. consumers (and especially Gulf Coast residents) needn’t assume the worst, but should just be aware that, even on a beautiful summer day, storm clouds might be just over the horizon.

U.S. Average Retail Gasoline Prices Gain 2.5 Cents
The U.S. average retail price for regular gasoline increased by 2.5 cents last week to 289.2 cents per gallon as of June 5, which is 77.6 cents higher than last year. Prices rose last week after falling the previous two weeks. Prices were mixed throughout the country, with the Midwest seeing the largest price increase of 5.5 cents to 281.5 cents per gallon. West Coast prices remained the highest in the nation, falling 0.4 cent to 320.1 cents per gallon, while California prices gained 0.3 cent to 326.9 cents per gallon. The East Coast saw a price increase of 1.5 cents to reach 287.4 cents per gallon.

Retail diesel fuel prices rose 0.8 cent to reach 289.0 cents per gallon as of June 5, which is 65.6 cents higher than last year. Prices were mixed throughout the country, with the Midwest seeing the largest increase of 1.3 cents to 283.7 cents per gallon. West Coast prices remained the highest in the country, falling 0.2 cent to 315.9 cents per gallon, while California prices stayed flat at 322.7 cents per gallon. East Coast prices gained 0.8 cent to 288.1 cents per gallon.

May Propane Build Falls Short of Average
Despite a late month surge in inventory gains, U.S. inventories of propane fell short of reaching the most recent 5-year average May build by nearly 29 percent. The May 2006 build totaled about 6.7 million barrels, compared with the 5-year average for May of 9.4 million barrels. With last week’s 1.5-million-barrel gain, U.S. inventories of propane moved up to an estimated 41.2 million barrels as of June 2, 2006, a level that continues to track near the lower boundary of the average range for this time of year. Inventories were up in all regions last week, with East Coast inventories posting a 0.1-million-barrel increase, while inventories in the Midwest and Gulf Coast areas reported respectively higher gains of 0.9 million barrels and 0.4 million barrels. The combined Rocky Mountain/West Coast regions reported a 0.1-million-barrel increase during this same time. Propylene non-fuel use inventories climbed higher by 0.2 million barrels last week, accounting for a larger 7.3 percent share of total propane/propylene inventories compared with the prior week’s 7.1 percent share.

Text from the previous editions of “This Week In Petroleum” is now accessible through a link at the top right-hand corner of this page.