Well I had an interesting Wednesday. I wanted to give you a free energy trade after the hurricane, but I wasn’t able to for reasons well beyond my control.
The remnants of Hurricane Ida paid an unwelcome visit to the Washington D.C./Baltimore area. In fact, the storm — which morphed into a tornado here — nearly paid me a house call.
The stretch of road it ran through is not even an eighth of a mile from my house. You can see an image of the wreckage near me.
The yellow color you see in the middle of the photo if you follow the link, was once the golden arches of our local McDonald’s, where my daughter prefers to get Happy Meals. The tornado ripped the giant metal sign right out of the ground by its roots.
I recently got my car window fixed at that Safelite, now almost completely destroyed.
I generally buy gasoline on the other side of that Burger King sign… the station has been reduced to rubble and prices in town are starting to rise.
I grew up in a state that went around a century without a sizable tornado — West Virginia — so I’m not used to that kind of thing. It’s honestly pretty scary to me.
I can’t even imagine what it must have been like to ride out the storm in Louisiana where Ida made landfall, but a lot of people did just that.
And now that damage reports and data are coming in, we’re starting to get an overall picture of what to expect for a while. Which has led me to a solid energy trade after Hurricane Ida’s visit.
The first thing I want to highlight is the outage in Gulf of Mexico oil wells, which stands at around 1.7 to 2 million barrels per day.
Source: Bloomberg New Energy Finance
While large compared to last year’s effects from Hurricane Laura, it sits below the level of February’s deep freeze in Texas.
But the big difference here is refinery outages, which total 1.7 million barrels of gasoline per day.
Source: Bloomberg
Wells and refineries have separate issues, though.
My Top Energy Trade After the Hurricane
Refiners don’t have power, so they can’t run… period, full stop.
And while wells could run now, the port (Port Fourchon) that transports all of the rig hands to work — not to mention all of the food they eat — sat at the epicenter of Ida’s landfall.
Beyond that, the power is going to take a few weeks to restore completely, and those rig hands may be dealing with home damages themselves.
Source: Bloomberg
As such, it’s going to take a few weeks to bring that capacity back. Even then, it may be poorly staffed.
Lengthy refinery outages mean less crude demand. And as I’ve said before, we are moving into a season that typically sees builds in inventories.
Source: Bloomberg
That’s bearish for crude prices. BUT with the GOM production out, the two effects may cancel each other out for now.
Gasoline, on the other hand, typically draws at this time of year while refineries reformulate away from their summer blends.
Source: Bloomberg
With refinery production also down indefinitely, I think this energy play makes sense after the hurricane. Let’s pick up a stake in the United States Gasoline Fund (NYSEArca: UGA), as gasoline is set to see upward price pressure for at least five to 10 days, and significant draws are likely to help support it.
Also, set a tight 5% trailing stop just in case something negative happens to the whole complex.
I’ll be back with a weekly wrap-up Friday, so until then…
All the best,
Matt Warder
