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Weather the Storm: Predicting Energy Markets in a Hurricane

by | Aug 30, 2021 | Uncategorized

New Orleans is my favorite city on the planet.

Whether it’s the great food, the great culture or the best music, that city always finds a way to keep me wanting to come back time and time again.

Every time I visit, I get the urge to relocate permanently. 

But family life keeps me grounded here on the East Coast. And besides, my background in music (10 years in the industry, jazz performance undergrad) and deep expertise in the energy sector (chemistry degree, over 15 years covering oil, gas, coal, power and mining) give me plenty of excuses to head down as often as possible.

However, it’s not the food, the culture, or the music that’s on my mind at the moment…

It’s the people.

Although the Big Easy’s post-Katrina levee infrastructure rebuild has held up relatively well thus far against Hurricane Ida’s torrential wind and rain, we can’t say the same about its power infrastructure. As the entire city goes without power, we need to start thinking about energy markets during a hurricane.

Source: Entergy

Ostensibly the entire city is without power according to local provider Entergy. And worse, it may be as much as three weeks until it’s restored.

Major damage to buildings and infrastructure is piling up in the storm’s wake. Hospitals fully packed with COVID-19 patients across the region are being forced to evacuate facilities. 

FEMA analysts estimate the storm could cost insurers as much as $15 billion…

But that estimate was made before Ida’s massive rainfall inundated poor little LaPlace, LA and pushed up the Mississippi River all the way to Vicksburg, MS before turning east.

In a day or so, it’ll all come rushing back down… and it won’t be until then that we’ll get a true sense of just how bad this storm was.

So at least until then, NOLA will be on my mind… hoping for the best.

How Energy Markets Behave During a Hurricane

The one positive I always try to take away from black swan events like these is that they provide us the opportunity to learn about markets.

And one lesson I’ve learned over the years is that the crude oil complex behaves in relatively predictable ways when hurricanes hit the Gulf of Mexico.

First, traders tend to go long crude oil and gasoline in advance of the storm.

And following Monday’s low in both the West Texas Index — or WTI, in parlance — and RBOB Gasoline futures, that’s exactly what happened.

Source: Bloomberg

WTI Crude is up 11% since that period. Gasoline has fared even better, up 14%.

But when the storm actually hits — especially if it affects Gulf Coast Refineries — action almost always runs in the other direction.

Just look at the energy markets during Hurricane Laura, which pummelled refiners and Liquefied Natural Gas terminals in Louisiana around this time last year.

Source: Bloomberg

Sure, similar five to 10% gains were available to traders on the way up.

But on the way down they were enormous 20-25% moves.

And look how much these commodities have ripped over the past week.

Source: Bloomberg

If oil and gas transmission structures prove to be intact, expect these price moves to turn around. 

Given the power outages, that may take as long as a week to find out. And as such, we’ve got some time to prepare.

So keep an eye out for tomorrow’s email, because I’m going to share with you a few ideas on how to position and execute on energy markets during a hurricane.

And in the meantime, keep the great people of Louisiana and Mississippi in your hearts and minds…

All the best,

Matt Warder

WRITTEN BY<br>Matt Warder

Matt Warder

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