The hurricanes are coming

SMARTSHARE

The National Oceanic and Atmospheric Administration (NOAA) of the US has forecast an above-normal hurricane season for the year 2007. The hurricane season in the North Atlantic Ocean runs from June 1 to November 30.

You might wonder what the relevance of this news is for our markets, halfway across the globe. An active hurricane season could result in higher crude prices, which in turn could chase our inflation higher.

With the finance minister further lowering his desired rate of inflation to 3 per cent, anything that even mildly raises the inflation levels would be negative for the markets.

How the hurricanes affect the crude prices is a story that will be told in the later paragraphs, but let's first understand how active this season is going to be.

NOAA has forecast 13-17 named storms, 7-10 hurricanes and 3-5 major hurricanes. This prediction signifies an expected sharp increase in activity from the near-normal season observed in 2006.

The prediction for an above-normal 2007 hurricane season reflects the expected combination of two main climate factors, the continuation of conditions that have been conducive to above-normal Atlantic hurricane seasons since 1995, and the strong likelihood of either ENSO-neutral or La Niña conditions in the tropical Pacific Ocean.

Colorado State University also issued a similar forecast on May 31. It estimates that 2007 will have about 9 hurricanes (the average is 5.9), 17 named storms (average 9.6), 5 intense (category 3-4-5) hurricanes (average 2.3) The probability of US major hurricane landfall is estimated to be about 140 per cent of the long-period average.

As temperatures rise in the North Atlantic Ocean, off the western coast of Africa, tropical disturbances are formed. These then travel westwards and some of them take the form of tropical depressions, which then graduate to a tropical storm, when they achieve a speed of 39 miles and hour and hurricane status, when they cross 74 miles an hour.

Not every tropical depressions becomes a storm or a hurricane. But even those that do may not bring harm to life if they do not make a landfall. Some of them ultimately end up in the Gulf of Mexico and make a landfall anywhere from Mexico to Florida. This is where it hurts.

Apart from the loss of life and property that follows a hurricane landfall, the oil facilities, which abound in this part of the US, are also at risk. The Gulf of Mexico is home to about a third of the US Oil and Gas producing facilities.

Some 4,000-odd mobile and fixed platforms dot the Gulf waters from Texas to Louisiana. When Hurricane Katrina struck in 2005, it put 85 per cent of the Gulf capacity out of operation and about 15 per cent of the facilities were still un-operational when the season began in 2006.

Out of the 9 hurricanes that are forecast, even if one passes over this patch in the Gulf where the oil facilities are concentrated, it could impact crude prices by about $3-5 a barrel.

Then there is the issue of Louisiana Offshore Oil Port (LOOP), which is a deepwater port in the Gulf of Mexico. LOOP provides tanker offloading and temporary storage services for crude oil transported on some of the largest tankers in the world.

Most tankers offloading at LOOP are too large for US inland ports. LOOP handles 13 per cent of the US's imported oil and connects by pipeline to 35 per cent of the US refining capability.

Hurricanes that strike the Louisiana coast could well put this out of order. Besides, the bad weather that precedes a hurricane may keep these tankers waiting for endless days without unloading.

So a hurricane in the Gulf means not only a third of the US production does not reach the shore, even the imported crude is shut off, creating windows of opportunity that may send crude soaring.

One must remember that hurricane forecasting is still not a perfect science. Last year, only fifty per cent of the expected hurricanes turned and none of them made a landfall. So will 2007 will go the 2006 way?

Chances of that happening are remote as since 1945, the US has had only two consecutive-year periods when there were no hurricane landfalls. Andrea, Karen, Melissa and co. could give inflation watchers some unexpected jitters.