The Meteorological Week Ahead: Welcome to the Shooting Gallery

I guess El Nino decided to take the week off. After two and a half months of inactivity, the tropics have sprung to life, with three named storms developing in the last 60 hours-Ana, Bill, and Claudette-and a fourth strong wave off of Africa. I will discuss each of these in order of threat to the US,  following a brief analysis of cooling demand for the US next week.

Note: With the hurricane season heating up, Dr. Cane is now on Twitter as DrCane09 since this is often a faster way to provide updates as things quickly change. FOLLOW ME for regular updates regarding the Tropics, Trading, and misc other weather stuff.

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US Temperature Forecast

This week’s temperature forecast will be very symmetrical-warmth on both coasts with a trough and cooler-than average temperatures across the center. The cool weather in the Midwest will be due to a cold front sweeping down from southern Canada. It is this same trough that is forecast to later steer Hurricane (now Tropical Storm) Bill away from the United States.

Total Cooling Degree Days are shown below in Figure 1.

Figure 1: Total Cooling Degree Days for the upcoming week

Compared to last week, most areas of the country will see cooler temperatures. The exceptions will be the Northwest, the extreme Northeast, and Texas. Areas seeing the greatest cool down will be the upper Midwest, California, and the Southern Mid-Atlantic. The Change in Cooling Degree Days is shown below in Figure 2.

Figure 2: Change in Cooling Degree Days week-over-week

With 7263 total population-weighted cooling degree days, this upcoming week will be the third warmest of the summer, after last week and the week of July 25. I forecast there to be 9.3% fewer cooling degree days  this week than last week. Based on this data, I expect the natural gas injection for this week (to be reported August 27) to be 59 BCF, which is below the 5-year average of 64 BCF and substantially below last year’s injection of 102 BCF.

Based on last week’s temperatures, I expect this week’s EIA storage report to show an injection of 55 BCF, above the average of 42 BCF, but below last year’s injection of 88 BCF. It would also represent the lowest injection of the summer.

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The Tropics

There are three active storms in the Atlantic basin. A broad tracking map is shown below in Figure 3 highlighting each of these storms.

Figure 3: Tracking map for the Atlantic Basin showing three storms–Ana, Bill, and Claudette

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Neither of these storms is directly threatening to boost commodity prices, although Ana, or her remnants, are expected to enter the Gulf late in the week. Each of these three storms is analyzed below.

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TS Claudette

Tropical Storm Claudette  developed very quickly, going from “tropical blob” to “tropical storm” in roughly 15 hours. A westward-moving tropical wave acquired a circulation as it passed over Key West, Fl yesterday with strong winds and heavy rains, developed sufficient convection to be declared a Tropical Depression at 2am this morning, and was declared a tropical storm today at 12pm. Claudette’s rapid development can be attributed to the warm waters of the Gulf of Mexico, with some areas pushing 88F, and low shear. It currently has top winds of 50 mph and is moving to the NW at around 15 mph, although it appears to be slowing down slightly. Tropical storm warnings have been issued from the Florida/Georgia Border to Suwannee River, Fl. Claudette has a few small core, and I expect only a very small portion  of this warning area to actually experience tropical storm conditions.

Radar out of Pensacola, shown above, indicates a rather well-defined storm with a clear center of circulation and even a sort of proto-eyewall structure trying to form. Claudette will not have much time to intensify as it is moving quickly to the northwest, but  should make landfall this evening on the Florida Panhandle between Panama City and Apalachicola  as about a 60 mph tropical storm. While geography of the panhandle makes the area very vulnerable to storm surge, the small size of Claudette and its fast motion will make any surge less than five feet. Rainfall will be the greatest threat from the storm, though due to its rapid forward speed this should be less than five inches in  most places. That being said, this storm may come as a surprise to some residents who have not been keeping a close eye on the tropics.

I expect Claudette to have minimal impact on the natural gas infrastructure of the Gulf. It is east of the primary gas fields and should only be in the Gulf for another 6  hours, making it rather pointless to shut-in rigs and evacuate drillers.

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TS Ana

Not to sound callous, but tropical storm Ana would make the ideal cancer patient:  She has got some serious will to survive. After being downgraded to a tropical wave after she succumbed to dry air and strong shear, Ana regenerated Saturday morning. Since then, Ana has continued to struggle despite minimal shear due to her fast forward motion that has caused the center to race far ahead of the convection. If not for a few well-timed bursts of convection over the center, Ana would likely have already been downgraded to a tropical depression or even an open wave. In fact, right now it doesn’t appear to have much of a circulation, although a recent flare up of convection is trying to wrap around a possible center.  This new burst has also pulled the storm to the north and the track shown in Figure 3 above may eventually need to be shifted northward. The hurricane hunters will be investigating Ana today to determine its status.  I give Ana a 40% chance of dissipating over the next 48 hours.

If it survives, Ana should continue west-northwestward, moving over, or just south of, the Greater Antilles of Puerto Rico, Hispanola, and Cuba. By Thursday or Friday, it could be entering the Gulf of Mexico and could head towards the same area of Florida that Claudette is striking today. That would make for a rather interesting insurance filing–“On August 16th, we were struck by Tropical Storm Claudette and a week LATER were struck by Tropical Storm Ana.” However, Ana has too many questions regarding its short-term fate to be worried about what it will do five days from now.

Should it reach the Gulf, Ana may threaten some of the oil and natural gas infrastructure in the Gulf.

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TS Bill

Having been long forecasted by the computer models, tropical storm Bill finally consolidated its circulation yesterday to become the season’s second named storm, forming roughly 12 hours after Ana. Bill remains a very broad system will its spiral bands radiating several hundred miles out from its center. While the storm is entraining some dry air right now, conditions are forecast to be modestly favorable with warm sea surface temperatures of over 84F and shear less than 15 knots. It currently has 60 mph winds, but is foreast to strengthen and could become a hurricane as early as tonight. By the time it reaches the longitude of the Leeward Islands, I expect Bill to be a major hurricane, with winds in excess of 110 mph.

It now appears that Bill will not make landfall in the United States. A trough of low pressure is forecast to move off of the East Coast right as Bill approaches the Bahamas. Despite their size and strength, hurricanes are actually big-pushovers when it comes to steering currents and usually just “go with the flow.” In this case, the flow will be from south to north and this should steer Bill northward and away from the Southeast coast. Bill will likely still throw some big waves at the US and it is too early to say if it will curve fast enough to miss the Northeast/Canada. I give Bill a 50% chance of recurving before it ever interacts with the United States.

It is unlikely Bill will ever enter the Gulf of Mexico to affect Oil/gas production.

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Elsewhere in the Tropics

A strong tropical wave moved off of the African Coast yesterday. While it is not much to look at right now, several of the more reliable models are indicating that it may slowly develop over the next few days. Just something to watch.

In conclusion, while there are a lot of things that COULD happen, I do not see anything that immediately threatens the Natural Gas infrastructure.  While this burst of activity is promising for the rest of the season, I wouldn’t rush off an buy large Canedex positions yet. I currently own three Canedex stocks: UNG, SWN, and VLO.

Note: Major Karma Points to the first person to correctly identify the storm shown at the top.  This is going to be a common theme of posts for the foreseeable future. A small hurricane warning flag will be awarded to the individual with the most points at the conclusion of the hurricane season, provided that they have at least 12.

1. Wabisabi-10

2. DPeezy-8

3. TraderCaddy-4

4. Yogi and Boo Boo-3

Disclaimer: Forecasts and Opinions are my own and are subject to error. Please rely on official National Weather Service forecasts.

Comments »

With two areas of interest in the tropics, I thought that I would provide a list of good hurricane plays. The “Canedex” is list of 13 companies across the Oil/Gas, Oil and Gas Services, Refiners, Home Improvement, and Insurance sectors that all have exposure and increased volatility during hurricane season. These make good speculative longs ahead of storms, and sometimes equally good shorts following storms as damage is assessed and fear wanes. The energy sector and microcap dicerolls are best for single, intense storms that result in knee-jerk reactions, while home improvement and insurance plays are best for long, drawn-out seasons. Just remember, when you are praying for hurricanes,  don’t be a Horse Face.

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Oil and Natural Gas

United States Natural Gas Fund (UNG)

Obviously the purest natural gas play out there, as this fund tracks (or tries to) the day-to-day oscillation of the commodity. 15% of all US natural gas production occurs in the storm-vulnerable Gulf of Mexico. With NG at around $3.40/MMBTU and possibly two storms threatening the US over the next 10 days, this would seem like a good play. I am a little bit concerned as the fund is trading at between 5-8% above its NAV, due to issues in releasing new shares. I do have a position in this fund.

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NGAS Resources (NGAS)

NGAS is a small exploration and production company focused in the Appalachian region. First, this means its operations are not threatened by Gulf Storms. Second, it is both a small cap stock and a pure natural gas play. Thus, it is driven strongly by flunctuations in natural gas price, essentially a leveraged way to play natural gas. While it sat out the 2008 season, it experienced substantial volatility in the 2004 and 2005 seasons. I currently have no position in the company.

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Southwestern Energy (SWN)

Southwestern is an oil and natural gas producing company focused on the shale fields in Pennsylvania, Oklahoma, Arkansas and Texas. Once again, this means that the company is not exposed to damage from a Gulf storm, yet can still take advantage of price spikes in the underlying commodities. I have no position in the company.

In the sector, I am also fond of NOV and RIG as hurricane plays.

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Oil and Gas Services

Gulfmark Offshore, Inc (GLF)

Gulfmark provides transport to offshore oil and gas facilities. The Company’s vessels transport materials, supplies and personnel to offshore facilities, as well as move and position drilling structures. Offshore support vessels generally fall into seven functional classifications derived from their primary or predominant operating characteristics or capabilities: anchor handling, towing and supply vessels (AHTs), platform supply vessels (PSVs), Fast Supply or Crew Vessels (FSVs/Crewboat), specialty vessels (SpVs), standby rescue vessels (Stby), construction support vessels and utility vehicles. In the event of damage to rigs, such a company will be involved in the repair process.

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Global Industries, Inc (GLBL)

Global Industries, Ltd. provides construction and subsea services, including pipeline construction, platform installation and removal, project management, construction support, diving services, diverless intervention and marine support services to the offshore oil and gas industry primarily in selected international areas and the United States Gulf of Mexico. Such a company will be involved in the aftermath of a Gulf Hurricane.

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The Refiners

Valero (VLO) and Western (WNR)

Both of these companies are based in Texas and refine crude oil into gasoline and distillates. Gulf hurricanes moving towards Texas are technically detrimental to their business as they cause shut-ins or potentially physical damage to facilities. However, the resulting shortages increases these company’s margins and the shares can see price spikes. Last year, for example, during the month of Gustav and Ike, Western saw its shares pop 50%. I have a small position in VLO.

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Home Improvement

Lowes (Low) and  Home Depot (HD)

These companies provide the raw materials to protect personal property ahead of a storm, and then to repair it after the storm. Following the 2005 season, each of these company’s sales increased by about a percent. Obviously, these are safter large cap stocks and not pure hurricane plays, but news of an impending storm can certainly provide a fear-based boost. I may get long some LOW on this pullback.

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The Insurers (Short)

Allstate (ALL) (Short)

Allstate is the largest publicly-traded personnel insurer in the United States. Despite its size, it still has considerable exposure to the Gulf Coast, putting its profits at risk in the event of a strong landfalling hurricane. During the 2004 hurricane season in which Charley, Ivan, and Jeanne all made landfall as Major Hurricanes, Allstate reported losses from these storms of over $1.11 Billion. In 2005, losses from Dennis, Katrina, and Rita exceeded $3.0 Billion. However, it is making attempts to reduce its Gulf Coast exposure.

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Universal Insurance Holdings (UVE) (Short)

Universal Insurance Holdings is a Ft. Lauderdale-based company providing home-owners insurance against hurricane damage to customers in North Carolina, Georgia, and Florida. It boasts 360,000 clients in the state of Florida alone. Since it trades on thin volume with a market cap of just $190 Million and is exposed to Florida, it makes for a good  pure hurricane play. If your broker can borrow shares, this may be a good short should a storm look to impact Florida.

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Microcap Dicerolls

National Storm Management (Pink Sheets: NSMG)

National Storm Management helps to rebuild homes and businesses after natural disasters and is a very direct play on hurricanes. During the 2005 season, this stock saw its share price increase 250% and last year during Ike and Gustav it rallied over 150%, before promptly dropping back to where it had been pre-hurricanes.

I mentioned this one in my post on Wedneday, and today it is up over 30%. You’re welcome. On a pullback, I may allocate a very very small portion of my cash into this. More for shits and giggles then anything else, since ordinarily I think penny stocks are a big waste of time and money.

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Home Solutions of America (OTC BB: HSOA)

Like NSMG, Home Solutions of America is in the business of rebuilding following natural disasters. This one rallied over 100% during the 2005 season (and a further 150% into the 2006 season), but sat out last year’s season.

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The Tropics

Tropical Depression #2  succumbed to wind shear shear Thursday morning and advisories were discontinued, but has made a recovery over the past 24 hours and may attain tropical depression-hood once again in the next 48 hours. Because of its weakening, it was steered westward by the low-level flow and now looks unlikely to curve out to sea. None of the models are very agressive on redeveloping the system, but it will need to be watched.

The large wave off of Africa (designated Invest 90I)  has continued to organize and is on the verge of becoming Tropical Depression #3. Since this storm will be further south, it is likely to avoid the dry air and wind shear that has plagued TD #2. All of the computer models track it westward into the Northern Lesser Antilles as a hurricane. From there, it either moves into the Gulf, strikes the Southeast or Mid-Atlantic, or recurves just east of the coastline. Which of these three tracks is taken will be destermined by its forward motion, which will dictate its interraction with a trough that would/wouldn’t pull it northward. These events are still 7-9 days out. However, the model consistency up to its impact on the Leeward Islands has been remarkably consistent so it is likely we will be dealing with a very large, strong storm by the beginning of next week.

Because Ex-TD 2 and 90l are similiar in organization right now, it will be a horserace to see which becomes Ana and which becomes Bill, should they both continue to develop. Personally, I think Bill is a much better Hurricane name, so I’m rooting for the big wave off Africa to get that one.

I will have a full update on Sunday.

Note: Major Karma Points to the first person to correctly identify the storm shown at the top.  This is going to be a common theme of posts for the foreseeable future. A small hurricane warning flag will be awarded to the individual with the most points at the conclusion of the hurricane season, provided that they have at least 12.

1. Wabisabi-10

2. DPeezy-7

3. TraderCaddy-4

4. Yogi and Boo Boo-3

Comments »

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After two months of clear sailing, the tropics are heating up in a hurry, with a tropical depression that will soon be Ana, a strong wave soon-to-be a potentially dangerous Bill, and several other areas of interest. The tracking map below shows the two primary areas of concern.

Figure 1: Tracking map showing a tropical depression and a strong wave that may develop into “Bill”

Sometimes I think that the Weather Gods and the Stock Gods had a common ancestor somewhere up the Divine Evolutionary Tree.

Towards the end of a Bull run, you see so-called experts calling for the market continuing to vault higher forever. And then Bam! all of a sudden the Stock Gods drop the Dow 1000 points, pummeling your bank account and making you look like a fool.

Likewise, for the past month or so, so-called meteorologists have been spouting off about how inactive the 2009 hurricane season will be, how El Nino grips the Atlantic in his steely vice, how there will be no storms the entire year, etc. And now, just to show who’s the boss in these parts, the Weather Gods look to send a train of storms our way: Ana, a potential deacon of death in Bill, and finally Claudette shortly behind her. Show some respect already.

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Tropical Depression 2

Figure 2: Visible satellite of TD #2

Tropical Depression 2, first designated yesterday morning, has maintained strength and  is on the verge of becoming TS Ana with its 35 mph winds. It is situated roughly between the Lesser Antilles and the Cape Verde Islands. It is moving west at about 12 mph. Ana is a rather small storm, especially considering its “Cape Verde” origins.

Intensity Forecast

The depression is never forecast to be in a very favorable environment. The storm is experiencing some easterly shear at the moment, imparted by the outflow from a much larger wave to its east, which is blowing all of its convection to the west and partially exposing its center. Most of the computer models intensify Ana up to a modest Tropical Storm 60 hours, which seems reasonable to me, if a little bit aggressive considering the exposed center

Down the road, if TD #2/Ana begins to recurve to the northwest per Figure 1, it will encounter strong westerly shear which could substantially weaken the storm. Additionally, north of about 20N, there is a region of Saharan Dust, or dry air that will preclude development. If it follows this path, it would likely weaken to a minimal tropical storm, or even dissipate. Both of these two hostile features can be seen in the water vapor image in Figure 3.

Figure 3: Latest water vapor imagery showing a large area of dry air to TD #2’s west and north

If TD #2 maintains a westerly track towards the Leeward Islands, it will not encounter strong shear or significant dry air, and will be moving over progressively warmer ocean temperatures. While conditions would not be downright favorable for intensification in this region, they would not cause substantial weakening and Ana could be approaching the Islands as a strong Tropical Storm.

Regardless of the track, it appears that Ana will have at least an intermediate peak in intensity in about 48 hours.

Track Forecast

Climatologically, storms that develop as far east as TD #2 (near the Cape Verde islands) usually recurve out to sea without making landfall. This is generally because they have such a long distance to encounter weaknesses in the Bermuda High.

While the computer models have shifted westward over the past few days, most still show Ana turning to the Northwest in the next couple of days as it encounters a small weakness in the subtropical ridge. The HWRF model shows this weakness as being sufficient to recurve the storm, while the GFS computer model shows the ridge rebuilding and pushing Ana back westward towards the islands.

The track will also depend on its intensity. A shallow, weaker system is more likely to be steered westward by the low level flow, while a strong storm is more likely to feel the upper level steering currents and be pulled poleward.

Personally, I am a big fan of climatology and see TD #2 being pulled northwestward. I also think that the storm will never obtain hurricane strength should it follow this path. I give Ana a 30% chance of ever making landfall as a tropical system and a 30% chance of dissipating in the next 72 hours due to strong shear and dry air.

Other Areas of Interest

Nearly all of the computer models continue to vigorously develop the large, strong wave east of Ana that I mentioned in my post last Sunday.  It already appears that this wave has an associated area of low pressure and may become a TD as early as tomorrow afternoon. This can be seen in Figure 3 below.

Figure 3: Proto-Bill

Several models make this system a very large and  strong hurricane. Right now it appears that the wave is too far south to recurve and it will likely make it to the Leeward Islands. Some of the computer models take it into South Florida and then the Gulf while others take it into the Northeast. None recurve it out to see.

A lot of meteorologists are very concerned about this one, due to its large size and the consistency amongst the models. Nearly all of the global models have been developing the wave for the past five days, and most have been taking it towards the Caribbean and then Florida. It will have to be watched very carefully and will likely be a bigger threat than TD #2. Fortunately, we will have a very long time to track it. I give this wave a 60% chance of becoming Bill over the next 72 hours.

Several of the models develop the wave behind Proto-Bill into “Claudette” and take it westward towards the islands as well. I give a 30% chance of seeing this wave develop.

All three storms are shown below in the GFS computer model run for this time next Wednesday.

Figure 3: GFS Model run for next Wednesday showing three different storms in the Atlantic.

A few models also develop a stalled out trough sinking into the Gulf of Mexico into “Danny” over the next week and take this system up towards Texas. I give a 25% of seeing this situation evolve.

Affect of Hurricane Plays

Natural gas is priced right at what I believe to be well-supported by fundamentals, with Sept ’09 NG near $3.50/MMBTU. Any price under this in my mind represents a good deal in the intermediate-to-long term. While TD #2 looks unlikely to reach the Gulf and proto-Bill will be a close call, simply the news of a train of storms in the Atlantic may urge some speculative buyers to boost the price.

As for other hurricane plays, I may look at some non-energy sectors as proto-Bill may threaten Florida and the East Coast.

First, I like Home Depot (HD), a solid name whose business may receive a boost merely on news of a threatening storm.

Second, getting short the insurers may be a good move. Universal Insurance Holdings (UVE) does a lot of business in Florida, so this may be a good short play.

While I hate penny stocks and usually consider them a surefire way to lose money, National Storm Management (NSMG) has shown extreme volatility as a past hurricane play and may be a good dice-roll.

I will have a complete list and discussion of good, diverse hurricane plays on Friday.

Note: Major Karma Points to the first person to correctly identify the storm shown at the top.  This is going to be a common theme of posts for the foreseeable future. A small hurricane warning flag will be awarded to the individual with the most points at the conclusion of the hurricane season, provided that they have at least 12.

1. Wabisabi-10

2. DPeezy-7

3. TraderCaddy-4

4. Yogi and Boo Boo-2

Comments »

Lots to talk about in the weather world this weekend: Heat wave in the Midwest and East, Felicia hitting Hawaii, and the awakening of the Tropical Atlantic.

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Forecast Temperatures

This upcoming week will see an extensive warmup with the nation as a whole experiencing its warmest week of the summer yet.  A large area of high pressure anchored across the Midwest will bring warm air northward pretty  much everywhere east of the Mississipi River. Places like Chicago, St. Louis, and Detroit will see highs in the mid 90s early in the week while Washington DC and Philadelphia may touch 100 on Monday. Heat indexes will push above 107 in these areas. This will obviously boost cooling demand across the eastern half of the country. Total cooling degree days for the upcoming week is shown in Figure 1 below.

Figure 1: Total Cooling Degree Day forecast for the upcoming 6-day period

Pretty much the entire Midwest will see cooling degree day increases of at least 30 CDDs compared to last week while most of the East will see increases of at least 20 CDDs. Areas of interior California can also expect to see CDD increases of 30 degree days. The only areas of the nation seeing cooling will be the sparsely populated Mountain West which will see widespread declines of 30 CDDs week-over-week. Week-over-week CDD changes are shown in Figure 3 below.

Figure 2: Week-over-week change in CDDs showing a large increase in the Midwest and East

With 8013 population-weighted cooling degree days, this upcoming week is forecast to be the hottest of the summer so far. Temperature data for the summer of 2009  is shown in the chart in Figure 1 below.

Figure 3: Cooling Degree Days for each week this summer. This week’s forecast is shown in red.

Should the forecast verify, this week would represent a 24.6% increase over the past week. I project a resultant +55 BCF natural gas injection in the EIA Storage report to be released August 20. This is below the 5 year average of +67 BCF and substantially below last years massive +88 BCF injection.

Based on last week’s temperatures, I project a +68 BCF injection for this week’s Storage Report. This is both above the average of +56 BCF and above last years +50 BCF injection. Also to note, last week’s storage report came in at +66 BCF, anomalously above consensus projections, including my own +57 BCF. Thus, it is possible that these projection figures may be too optimistic.

However, look for possible strength in natural gas over the next two weeks as we begin to see below average injections and increased tropical activity.

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The Tropics

The interminable period of inactivity in the Tropical Atlantic is nearly over. With no named storm by August 9, this marks the longest streak without a tropical storm since 1992 when Andrew formed on August 14. 2009 is unlikely to match this streak as there is a strong wave off of the Coast of Africa that will likely become Ana over the next two days. This wave is shown below in Figure 3.

Figure 4:  Infrared satellite of the tropical Atlantic showing the tropical wave destined to be Ana.

Most of the global models develop the system and it has been designated “Invest 99I” by the National Hurricane Center, which gives it a medium, or 30-50% chance of developing over the next 48 hours. I give it a 70% chance of becoming Ana. In fact, it looks to be near tropical depression strength right now.

Climatologically, most storms that develop this close to Africa ultimately recurve out to sea, and Ana looks to be no exception. Many of the diagnostic computer model runs indicate that the storm will recurve well east of the Lesser Antilles. However, it is much too early to write this forecast in stone. Wind shear is modest and most of the intensity models show the system becoming at least a modest tropical storm with winds of 65 mph. A retreating area of dry air to 99I’s north may eventually inhibit intensification should the storm recurve.

“Proto-Ana” is not the only game in town this weekend.  A second wave, still over central Africa, has strong convection and hints of rotation. Most of the computer models develop this wave as well into “Bill” and take it on a more southerly track towards the Leeward Islands.  This wave is shown in Figure 4 below.

Figure 5: Latest infrared satellite of Africa showing both Proto-Ana and Proto-Bill

The GFS computer model intensifies this wave into a hurricane and takes it into the Caribbean Sea by late next week. This is a long ways off, but the model runs have shown some consistency so this will need to be closely watched.

In conclusion,  I give a 70% chance of seeing a named storm this week and a 30% of seeking two named storms. While neither of these storms will threaten the oil and gas operations in the Gulf in the near term, the sudden shift in perspective from “no storms” to suddenly “two storms” may give a boost to futures. Additionally, should proto-Ana or Proto-Bill ever reach the Gulf, the timing would roughly coincide with the release of the natural gas storage report on August 20 for this upcoming hot week.

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Tropical Storm Felicia

As I have been mentioning for the past week, Felicia continues its march towards Hawaii. As of the latest advisory, the system has fallen below hurricane strength and is now a strong tropical storm with 70 mph winds. Since it is projected to pass through the islands tomorrow as a tropical storm, TS watches have been issued for the eastern Hawaiian Islands.

I have my doubts whether Felicia will still be a tropical storm by the time it reaches Hawaii. Based on its rather ugly satellite image, shown above, I think the current 70 mph might be a little bit generous.

Not only are water temperatures below the 82F threshold for sustaining a storm, but wind shear has now increased to 20 mph. Additionally the storm is essentially being sliced horizontally as its upper level motion is being impeded by a blocking high while its lower level motion continues to the west.

Regardless of its intensity, Felicia will likely bring very heavy rain that will trigger dangerous flash flooding. Flash flood watches have already been issued for the eastern islands.

Finally, Typhoon Morakot made landfall in Taiwan earlier in the week and has dumped epic amounts of rain on the island. There are confirmed reports of 80 inches over the past two days, and unofficial reports of 90+ inches. The all time world-wide 48 hour rainfall record is 98.42 inches set at Reunion Island in 1952.  This is one of those records, like Dimaggio’s 56 or Ripken’s  2632, that many feel will never be challenged. All told, Morakot has killed at least 56 people in the western Pacific.

Note: Major Karma Points to the first person to correctly identify the storm shown at the top.  This is going to be a common theme of posts for the foreseeable future. A small hurricane warning flag will be awarded to the individual with the most points at the conclusion of the hurricane season, provided that they have at least 12.

1. Wabisabi-9

2. DPeezy-6

3. TraderCaddy-4

4. Yogi and Boo Boo-2

Comments »

Conflicting viewpoints on the prospects of the commodity abound in the natural gas sector. Positive data from a meteorological and drilling standpoint contrasts with a very bearish supply report.

The Good:

1. The number of exploratory rigs drilling for natural gas increased by four rigs this week, to 681. This marks the third consecutive increase, an event that has not occurred since June of 2008. This data is shown in Figure 1 below.

Figure 1: Latest natural gas rig counts

On the one hand, a low natural gas count is favorable as it will eventually bring supplies back down. Since last summer when the rig count peaked at 1606, the count has plummeted 57% to a level that has analysts predicting US production to fall as much as 15% by late next year. However, the recent increases in rig counts show that producing companies are regaining confidence in their commodity. With prices under $4/MMBTU, many drilling companies are operating at loss. Thus, the drilling of new wells shows confidence for the relatively longer-term bullishness of natural gas. Historically, a bottoming in the rig count has corresponded with a bottoming in the commodity.

2. The spread between the front month contract (Sept ’09) and the next month (Oct ’09) is 27 cents, or nearly 10%. This is a strong contango, a situation that arises when the near month contracts are cheaper than the later contracts. Figure 2 below shows that this contango extends into the winter.

Figure 3: 12-month spread in NG futures contracts

The extreme spread in this months contract and the next leads me to believe that this contango has to collapse, and soon, either up or down. Producers either continue to produce to take advantage of the spread, which drives the long-term contracts down, or they cut production leading to a bounce in the near-term contracts.

3. Temperatures will rise considerably across a large portion of the country beginning this weekend. The east coast and midwest will likely experience the hottest weather of the summer over the next week. All of the east coast cities will break into the 90s by Sunday, with Washington DC approaching 100. This is bullish from a cooling demand perspective. I will have more a more detailed discussion in my Sunday post.

4. Stocks in the Oil and Gas sector have been very strong performers over the past two weeks (despite weakness in the underlying NG) with many leading names seeing considerable accumulation. While this may be just a byproduct of the broad market rally, it is also possible that speculators like the long-term prospects of the industry and are jumping on cheap names in anticipation of a later rally by the commodity itself.

The Bad

The EIA reported Thursday that natural gas inventories increased by 66 BCF to 3089 BCF for the week ending 7/31/09. This data is shown below in Table 1.

Table 1: EIA storage report data

	Stocks in Billion Cubic Feet (BCF)
	7/24/09	7/31/09	Change
East	1523	1579	+56
West	441	442	+1
Producing	1059	1068	+9
United States	2023	2089	+66

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The +66 BCF injection is substantially above the +42 BCF average for this time of year and greater than the +56 BCF injection from this time last year. The 3089 BCF in storage is also the highest value in either July or August since records began in 1976. On this pace, we should eclipse the 3565 BCF record set in 2007 by at least 300 BCF.

Worse still, this injection was substantially higher than predicted by analysts. Projections ranged from +50 BCF to about +58 BCF. My temperature-based model projected an increase of +57 BCF. Temperatures were the warmest they had been all summer last week . The fact that the actual injection so greatly exceeded these values indicates that either demand in a different sector has fallen or production has been ramped up.

Right now, it is in the best interests of producers to drill and store gas, due to the strong contango already mentioned. However, over the next month as storage reaches and exceeds record levels, I expect to hear many reports of companies cutting production. Chevron recently announced that by the end of 2009 it will not have a single land-based well active while Chesapeake too announced it will imminently cut production further.

Trading

While warming temperatures may help the short-term storage and the rising rig counts suggest a possible bottom by those in the industry, the high levels of storage do not suggest that gas has the fundamentals to rally. I will continue to hold my UNG position. I also have a large position in CHK from 22.90. While overextended, CHK has broken out of its nearly 8-month trading range.

In this market, I feel that playing the companies is advantageous to playing the commodity. Stocks in the Oil and Gas sector have outperformed both the market and the underlying commodity (NG) over the past two weeks and I feel in the short-term that the risk-reward is better here. I bought some Sandridge Energy (SD) this morning at $10.20, recommended by Cajun. I also like Linn Energy (LINN) here as well, but do not yet have a position. Until I see some tropical activity or get a better idea of this year’s max storage, I will neither add to nor sell my UNG position.

The Tropical Atlantic is quiet right now. Some of the computer models develop a wave between Africa and the lesser Antilles late this weekend. In the Central Pacific, Hurricane Felicia is beginning to weaken as it encounters cooler waters and more hostile upper level winds. As I discussed in my post Wednesday, it poses a rain threat to Hawaii, passing through the islands as a weak tropical depression or remnant low on Monday.

Note: Major Karma Points to the first person to correctly identify the hurricane shown at the top.  This is going to be a common theme of posts for the foreseeable future. A small hurricane warning flag will be awarded to the individual with the most points at the conclusion of the hurricane season, provided that they have at least 12.

Note 2: Today’s storm needs both a name and a year. It is trickier than the others, but the answer is given in the title of the post… Sometimes I like to amuse myself.

1. Wabisabi-8

2. DPeezy-6

3. TraderCaddy-4

4. Yogi and Boo Boo-2

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While the Tropical Atlantic remains quiet, one US state is finally threatened by a tropical cyclone: Hawaii. Hurricane Felicia, recently upgraded to a 115 mph Category 3, or “major” storm is projected to pass near or over the Hawaiian Islands in about 140 hours, as a weak tropical storm or depression. A recent satellite image of Felicia is shown below in Figure 1.

Figure 1: Satellite image of the eastern Pacific showing the large circulation of Felicia

Tropical systems are rare in Hawaii for three reasons. First, a large subtropical ridge is nearly always anchored just north of the island chain steering most storms several hundred miles to the south.  Second, the ocean temperatures just off Hawaii are too cold (<82) to support cyclone development. Or, if they are warm enough, they are too shallow and too easily mixed up to maintain a storm. Lastly, fast westerly winds in the area  impart strong shear on any storms making it to the Hawaiian Island’s latitude.

There are of course exceptions.

Hurricane Iniki struck the island of Kauai in 1992 as a 140 mph category 4 storm, taking advantage of a freak coincidence of a breakdown in the subtropical ridge and anomalously low wind shear. The storm track of Iniki is shown below in Figure 2.

Figure 2: The very unusual track of Hurricane Iniki

Iniki killed 6 people and did nearly $3 Billion in damage. Iniki struck just three weeks after Hurricane Andrew devastated South Florida. A tropical storm or hurricane has not made a direct hit on Hawaii since Iniki.

Felicia is projected to follow a very different path, approaching the Big Island of Hawaii from the east. As a strong storm, Felicia is being pulled poleward by upper level steering currents. However, as she begins to weaken she will become a more shallow system and will likely become steered more westward in the low-level flow, directly towards the Islands. The projected path is shown below in Figure 3.

Figure 4: Track forecast for Felicia

Computer models are tightly clustered around this track and the primary unknown will be the strength. The interplay between the track and the strength is somewhat ironic. The stronger Felicia is in the short term, the further poleward it will be pulled by upper-level steering currents. This means that it will reach cooler water and in fact be weaker by the time it reaches Hawaii. However, if it doesn’t strengthen in the short-term, it will be steered more westward by the low-level flow and remain further south, maintaining its strength in the long term. Thus, those in Hawaii wanting to avoid a tropical system should hope that Felicia continues to strengthen. Based on recent trends, this appears to be the case and I would not be surprised to see the track eventually shifted northward.

Today conditions are very favorable for strengthening, as Felicia is over very warm waters and under low shear. She may strengthen a further 15-20 mph before beginning a weakening trend. However, by the time Felicia reaches Hawaii, she will be traveling over very cold waters and experiecing strong shear and will likely be only a shell of her former self.

The various intensity models are calling for a weak tropical storm with sustained winds under 50 mph by the time it is approaching Hawaii in 120 hours.  These are shown below in Figure 4. The consensus seems reasonable to me.

Figure 5: Intensity forecasts of various computer models as a function of time

The faster the storm is moving, the less time it will have to weaken and the more likely it will be to hit the islands as a tropical storm, the first one to directly impact the islands in 17 years. I would not be surprised to see Felicia weaker than this, perhaps only a tropical depression, should it continue to move north.

However, the intensity of the storm is not too great a concern for Hawaii. With its deep water, Hawaii is not vulnerable to storm surge, nor is wind damage a major concern. Rather, even a weak tropical storm such as Felicia can deliver extremely heavy rainfall. The mountainous geography of Hawaii causes clouds to be forced upward, cooling them further and wringing additional moisture from the atmosphere. Should Felicia move directly over any of the islands, these areas can expect upwards of 10-15 inches of rain.

The National Weather Service has this say about Felicia right now:

”

IN THE EXTENDED FORECAST...WE ARE CLOSELY MONITORING HURRICANE
FELICIA...CURRENTLY LOCATED ALMOST 1800 MILES EAST SOUTHEAST OF
HILO... THE LATEST OFFICIAL FORECAST ISSUED AT 1100 PM
HST MONDAY BY THE NATIONAL HURRICANE CENTER IN MIAMI...FLORIDA
INDICATES HURRICANE FELICIA WILL MOVE WEST OF LONGITUDE 140W INTO
THE CENTRAL NORTH PACIFIC BY EARLY SATURDAY MORNING.
AT THIS TIME...IT IS TOO EARLY TO DETERMINE THE EXACT TRACK AND
INTENSITY FELICIA WILL BE AS IT APPROACHES THE HAWAIIAN ISLANDS LATE
SUNDAY OR MONDAY. THAT SAID...WE ARE HEADING INTO THE CLIMATOLOGICAL
PEAK OF THE CENTRAL PACIFIC HURRICANE SEASON...AND FELICIA SERVES AS
A REMINDER TO ALWAYS HAVE A HURRICANE PREPAREDNESS PLAN IN PLACE
DURING THE OFFICIAL CENTRAL NORTH PACIFIC HURRICANE SEASON

"

If any readers live in Hawaii, I would be interested to know if this storm is even on your radar right now (haha, pun intended) or do people not even care.

Should Felicia continue to threaten Hawaii, I will have further updates later in the week as the storm approaches the islands.

.

In terms of the market, I really like Chesapeake Energy. I bought the stock Monday at $22.20 and will continue to hold. The stock rallied yesterday on better-than-expected earnings and has been riding the coattails of the recent rally in natural gas.

Despite today’s pullback Chesapeake continues to climb, up about 1.5% to $23.50 having taken out the 50-day SMA. The stock is nearing long-term resistence at around $24.50 and should it break this barrier, I may look to add to my position.

Jason Gammel of Macquarie research wrote following yesterday’s earnings that “Chesapeake Energy is the most undervalued stock in the E&P sector.”  Gammel noted that he expects natural gas prices to stage a strong rally in the second half of 2010 and that “Chesapeake could be the best-performing stock in that rally.”

I continue to hold my UNG position.

Note: Major Karma Points to the first person to correctly identify the hurricane shown at the top.  This is going to be a common theme of posts for the foreseeable future. A small hurricane warning flag will be awarded to the individual with the most points at the conclusion of the hurricane season, provided that they have at least 12.

TraderCaddy moving up the rankings…

1. Wabisabi-8

2. DPeezy-6

3. TraderCaddy-3

4. Yogi and Boo Boo-2

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