Insights & Advice

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Labor Day and the Hurricane

As oil traders depart for the long weekend most of their attention will be focused on weather forecasts in the Gulf of Mexico rather than the backyard barbecue. Tropical Storm Gustav will be moving inexorably over the next three days, gathering strength with hurricane force as it bears down on refineries, drilling platforms and pipelines that account for 1.4 million barrels of daily oil and 17% of this country’s refining capacity. Oil and gas prices have been on a roller coaster ride all week as traders placed huge bets. Will it be another Katrina? Will the government tap the strategic oil reserves if necessary? What happens if it changes direction?

During this same week, three years ago, Hurricane Katrina followed by her sister storm Rita smashed into New Orleans creating devastation, death and disruption. Over 25% of America’s refining capacity shut down and a major pipeline was closed for two days. Oil, gas, heating oil and gasoline prices skyrocketed. Energy stocks exploded and Wall Street was a mess—for a day or two. Actually, things in the energy markets were pretty much back to normal within two weeks. But the market has a short memory and if you are on the right side of the trade you can make a lot of money. The question is which side do you want to play?

Demand for energy, thanks to high prices and a slow economy, is way down compared to three years ago. Natural gas production is growing and traders believe that supply may outstrip demand in the near future and prices are a bit lower then when Katrina hit. As for oil refining, there is more world-wide capacity now then there was then and most refiners are running at reduced rates so they could easily ramp up if needed.

On top of that, both the Department of Energy and International Energy Agency promised to release oil from the Strategic Oil Reserve if necessary. That news knocked oil down by two bucks on Thursday. It rose again on Friday with renewed speculation but by the end of the day it was down slightly to $115.46/BBL. Given the end of summer vacations, the lack of volume in the markets and the tendency by traders to speculate on any potential natural disaster; it is no wonder that all eyes and bets are focused on Gustav.

I’m no weather forecaster but if I had to, I would wager the hurricane won’t be nearly as damaging to our energy supplies as investors are expecting. My hunch is that the odds are against a hurricane hitting the very same area on the very same week three years later. And even if it does, the economics of the situation are different. Any energy dislocation would be would be short and brief.
As for the rest of the market week, GDP came in higher than expected for the quarter thanks to the government stimulus checks. Jefferson Country in Alabama, home county of Birmingham the state’s largest city, could file for bankruptcy and Lehman Brothers is laying off more workers. In short, the same old song of credit problems, financial woes and disappointing results from companies.

The S&P 500 started the month at 1260 and finished at 1282 with the Dow and NASDAQ gaining less than 2%. Some would call that progress. At least next week most of Wall Street’s regulars return to work. We’ll see how investors size up the market’s prospects for September. I’m betting on a bit more upside and then a sharp decline. In the meantime, be grateful you don’t live on the Gulf of Mexico. Have a great Labor Day!

Posted in A Few Dollars More, At the Market