Although it’s too early to project the exact location of Gustav’s likely landfall and its strength at that time, many models have the storm coming ashore in Louisiana as a dangerous Category 3 or Category 4 storm.

It might seem a bit crass to discuss the investing implications of this potentially devastating and life-threatening storm, but Gustav has already had an impact on oil and natural gas prices. If these weather models prove correct, the storm could be an important event, particularly for natural gas prices. As such, the impact on The Energy Strategist model portfolios simply can’t be ignored.

In June the Energy Information Administration (EIA) produced a detailed statistical and technical study of the potential impact of Gulf Coast hurricanes on oil and gas markets. Obviously, hurricanes Katrina and Rita back in 2005 were outliers; combined, these storms resulted in 100 million barrels of crude oil and 600 billion cubic feet of gas outages.

This is highly unlikely to be repeated. One reason I say that is the regulations governing offshore platform and rig construction have been greatly tightened since 2005. There’s likely to be far less offshore infrastructure damage even if Gustav impacts the same regions of the Gulf.

However, according to EIA data, the mean (average) impact of an intense hurricane (Category 3, 4 or 5) is an outage of 12 million barrels of crude oil and just under 73 billion cubic feet of gas production. Although the ranges around these average levels are quite wide, there’s plenty of historical precedent for a 50- to 75-billion-cubic-foot gas and 8- to 12-million-barrel oil outage even excluding 2005’s extreme season.

Hypothetically, let’s assume an outage in that range as a result of Gustav. Although the popular media–as usual–has focused on crude, the oil impact of a 10-million-barrel outage wouldn’t be all that important. Psychologically, you could see oil prices spike up to the mid-$120s, especially when you consider that oil and gasoline inventories remain, as a whole, tight. However, I’d expect the real impact on oil prices to be rather limited in size and scope. After all, oil is an international market, and the US is no longer the sole driver.

The impact on gasoline prices could be more severe. As I’ve pointed out on the blog At These Levels (http://.attheselevels.com) for the past few weeks, gasoline inventories are way below average for this time of year. Refinery outages along the Gulf Coast would exacerbate this situation and produce a spike in refined product prices relative to crude.

Natural gas would see the greatest impact. A 50- to 75-billion-cubic-foot gas outage would have a very real, sustained impact on prices. As I noted in the last issue of TES, the primary fear driving the pullback in gas prices since mid-summer is that strong US gas production would swamp demand and lead to glutted inventory levels heading into the winter heating season.  

The so-called gas injection season–the time of year when the US tends to add gas to storage–begins roughly April 1 and lasts until the first week of November when heating demand starts to kick in. Since the beginning of this year’s injection season, inventories of natural gas in storage have increased by 65 billion cubic feet above average levels. This small above-average build is primarily the result of a cooler-than-average August across much of the nation.

As I noted in last week’s issue, this relatively minor build suggests that fears of a gas glut are largely overblown; gas inventories are just 2.6 percent above the five-year average at this time. However, the important point to note is that Gustav could totally wipe out that above-average build and put the US into a shortage scenario in short order.

If Gustav has a one-off 65-billion-cubic-foot impact on gas supplies and inventories continue to build at an average pace through the first week of November, gas in storage will top out at less than 3.36 trillion cubic feet, a level that’s considered tight. In the event of a cold–or even average–winter gas prices could spike into the mid-teens or higher under such a scenario. This would be the price level required to attract more inflows of liquefied natural gas (LNG); UK gas prices currently trade at around double the US price.

Of course, this is all quite speculative. Nonetheless, the rally in gas this week suggests just how delicate the gas market is right now; there’s not much of a safety cushion in the form of inventories to handle a storm disruption.

As I explained in last week’s issue, I expect the natural gas strip to remain in the $9- to $12-million-British-thermal-unit (MMBtu) range even if Gustav has zero impact on gas supplies. Nonetheless, a more serious impact would likely catalyze a sharp rally for gas-levered names, especially those with exposure to the North American market.

Land driller Nabors Industries (NYSE: NBR) and shallow-water driller Hercules Offshore (NSDQ: HERO) would likely see upside as day rates for hiring rigs would tend to rise in response to higher natural gas prices. It’s also possible that the storm would destroy or damage shallow water jackup rigs in the Gulf such as those owned by Hercules. You might think that would be negative for Hercules, but that’s not the case. The company would recover most of its direct losses via insurance and would benefit from tighter rig supply.

On the producer front, EOG Resources (NYSE: EOG), Petrohawk Energy (NYSE: HK), Talisman Energy (NYSE: TLM) and, to a lesser extent, Linn Energy (NSDQ: LINE) would all benefit from higher gas prices. For those unfamiliar with these stocks, check out the last issue of TES for details.

I’d also note two additional points. First, as of this morning a second tropical system, Tropical Storm Hanna, has formed in the Atlantic. Although it’s several days away from threatening any land, this is another sign that the 2008 Atlantic season is shaping up to be more active than normal.

Second, this morning’s natural gas inventory report showed a 102-billion-cubic-foot inventory build. That’s bearish for gas any way you want to slice it. But the market is overreacting to what’s always a volatile weekly number. In this case, the above-average build was caused by cooler-than-normal August weather. This gives you the opportunity to buy into gas-levered names at a more favorable price.