Off-target hurricane-season forecast costly to markets
Posted on Saturday, October 7, 2006
The weathermen got it wrong again, and this time they disrupted more than a picnic.
In May, U. S. government and private forecasters made dire warnings about the looming Atlantic hurricane season, scaring away some insurance investors in a year the companies may end up turning in higher profits. Hedge fund officers, such as those at Amaranth Advisors LLC, gambled big that naturalgas prices would climb — and lost.
No hurricanes have struck the U. S. coast so far this year, and natural-gas prices have plummeted. This week, one of the most closely watched forecasters, Colorado State University, said it had overstated the hurricane risk. The bungled forecasts shed light on what happens when energy traders and investors rely too heavily on an inexact science.
“That’s the nature of the game when it comes to forecasting,” says Philip Klotzbach, the 26-year-old research associate who is the lead author of the Colorado State hurricane report. “We did the best we could with the information we had.”
Colorado State, based in Fort Collins, is one of many weather forecasters used by analysts. A U. S. National Weather Service Web site lists 322 “commercial weather vendors.”
Along with nervous coastal residents, their reports are pored over by traders in the $ 6 billiona-day natural-gas futures market, insurers calculating what to charge policyholders and investors judging how much to pay for insurance stocks.
Colorado’s hurricane reports have been considered a bellwether because of the reputation of their founder, William Gray.
“He’s the pioneer,” says Joe Bastardi, a meteorologist at AccuWeather Inc. in State College, Pa., which sells forecasts to oil companies, energy traders and hedge funds, among others.
Gray, 76, has lately ceded some responsibility for the reports to Klotzbach, a graduate student in atmospheric sciences.
In many years, “Dr. Gray’s Tropical Storm Forecast,” proved uncannily accurate. Early in 2002, 2003 and 2004, the reports correctly predicted the number of named storms in the Atlantic Ocean and Gulf of Mexico for the entire year.
The recent accuracy of the Colorado report is one reason this year’s first forecast, published in April, drew so much attention.
Klotzbach and Gray predicted 17 named storms, five of them intense hurricanes. They said there was an 81 percent chance of a major hurricane striking the U. S. coastline. It put the risk of one of them hitting the Gulf Coast, the center of U. S. oil production, at 47 percent.
Other reports took a similar view. The federal government’s National Oceanic and Atmospheric Administration in May predicted 13 to 16 named storms. Risk Management Solutions of Newark, Calif., which helps insurers set rates, said in March that an insurer that expected $ 100 in annual storm claims for a property in the U. S. Southeast before 2004 should assume an average of $ 150 a year through 2010.
Hurricane fears also propped up natural-gas prices, which touched a record $ 15. 78 in December. At one point after Katrina and Rita, all of the Gulf’s oil production and 80 percent of its gas output was shut. While natural-gas prices fell through midyear, as of late August they were still about $ 7, several times higher than the pre-Katrina lows.
Insurers, already reeling from Katrina, raised prices to recoup last year’s losses.
Prices for commercial properties along the U. S. coast rose as much as 500 percent in the second quarter this year, according to a survey by the Council of Insurance Agents and Brokers.
Some investors stayed away from insurers. The Standard & Poor’s 500 Property & Casualty Insurance Index fell 2. 8 percent this year through Aug. 15, compared with a 3 percent advance in the S&P 500 Index.
But as of this week, no hurricanes had made landfall in the U. S.
The Colorado State researchers said in a report Tuesday that great danger to the United States from hurricanes this year was over.
Among the losers this hurricane season was Amaranth, the Greenwich, Conn.-based hedge fund manager that had $ 9. 5 billion in assets as recently as August. After gambling that naturalgas prices would rise, Amaranth lost $ 6. 5 billion as they tumbled. The fund is closing.
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