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Oil stares down hurricane season
It's only May, but big storms could hit the Gulf, and prices, as early as June. Some say it could it be worse than last year?
By Steve Hargreaves, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) - The summer driving season has barely started, but already attention is turning toward the Atlantic, where an expected active hurricane season could combine with a shortage of gasoline stocks and drive energy prices past the record levels set in the wake of last year's storms.

"The impact of hurricanes on the gasoline market will be bigger this year than last," said Nauman Barakat, an energy trader at the investment bank Macquarie.

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That's because this year, due to a switch in gasoline formulations, there are fewer reserve supplies available to cover in an emergency, said Barakat.

And the problems won't only be felt at the pump - there could be a surge in the price of natural gas, used to create electricity that powers, among other things, air conditioners.

Brian Hicks, co-manager of the Global Resources Fund at Houston-based U.S. global investors, said the cost of future natural gas contracts is over $2 more than the cost of current contracts, which he said is a greater difference than usual.

For example, natural gas available for June delivery is selling for $6.83 per million British thermal units on the New York Mercantile Exchange. But natural gas for November delivery is going for $9.40.

As most of the energy that comes from the Gulf is in the form of natural gas, Hicks said the difference in the costs of contracts is an indication of trouble ahead.

"Right now the Street is factoring in disruptions," he said. "It looks like everyone is predicting an active hurricane season."

Fewer, stronger storms

While 2006 isn't expected to see as many storms as last year, experts say that warmer Gulf waters could make this year's storms stronger, faster developing and harder to predict.

"The Gulf of Mexico is like a bathtub," Michael Schlacter, chief meteorologist at the climate research firm Weather 2000, said of current water temperatures. "It's not supposed to be this warm until the middle of summer."

Schlacter said the primary concern is that warmer water can cause storms to develop and intensify faster. This makes preparing for a direct hit, whether on a town or oil rig, that much more difficult.

"Everything is happening boom, boom, boom, so fast," he said, saying scattered thunderstorms can turn into a Category 1 hurricane in a couple of days, and a hurricane can go from Category 1 to Category 4, a far more intense storm, in under 12 hours. "We're in uncharted territory here, we don't know how violent nature can become."

Last year's hurricane season, which saw the most named storms on record, was a disaster for the oil industry.

Hurricane Katrina knocked out 95 percent of the Gulf's oil production and nearly half the refineries when it tore through the region last August, and it took months for that production to come back online.

The impact on prices was huge, with oil shooting to a trading high of $70.85, at the time its highest non-inflation adjusted level of all time. Gasoline prices hit an average $3.06 a gallon, a number that has yet to be beat.

The Gulf accounts for one quarter of all U.S. domestic oil production and has the country's only deep water port for oil imports.

Predictions

This year, Philip Klotzbach and William Gray, two Colorado State University researchers whose hurricane predictions are widely read, predict 2006 will see 17 named storms, 9 hurricanes and 5 major hurricanes.

That's far fewer than 2005, which saw 28 named storms and 15 hurricanes, seven of which were Category 3 or higher. But it's still above average, which Schlacter attributed to us being in the middle of an active hurricane cycle, which varies in intensity every few decades.

The U.S. National Hurricane Center, which releases its hurricane estimate May 22, also emphasized the potential for a single storm to cause major damage, regardless of how many storms are predicted.

"If the numbers are low, people tend to kick back with their feet on the front porch," said a NHC spokesman. "That's when they really get clobbered."

More storms or no, oil companies say they're ready.

Chevron, the nation's second largest oil company, said it's not expecting any more disruptions this year than usual.

The company, which has 2,000 employees and 680 oil structures in the Gulf at any given time, also said it can evacuate its workforce using a fleet of a couple dozen helicopters in 72 hours or less.

"Chevron has been operating in the Gulf of Mexico since the 1940s," said a company spokesman. "We're used to it."

Barakat said the industry is probably better equipped this year than last to handle the storms, but also said it's their job to reassure the public.

"If they tell you they're not prepared, then people are going to say 'What have you been doing all year?'" he said. "But prepared for what? If we get another Category 5, can they handle it? I don't think so."

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.