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Hurricane Sandy’s Unique Effect on Energy Markets

Hurricanes can cause serious dislocations in energy markets.

The typical expectation is that oil and gasoline prices will rise as storms knock infrastructure offline. As a result, supply becomes scarce and consumers scramble for what’s still being delivered to the market.

That’s what has generally happened in the past, at least.

Looking at the seven most damaging storms over the past decade – (Katrina (2005), Ike (2008), Rita (2005), Wilma (2005), Charley (2004), Ivan (2004) and Irene (2011) – on average, gasoline prices have jumped 2.38% in the five days after the storms made landfall.

If you focus just on the storms that make landfall in the Gulf of Mexico and Texas (areas of high energy infrastructure concentration), gas prices jump 5.52%. And crude oil prices rose 3.96% in five days when storms hit the Gulf Coast states.

Yet when you just look at Hurricane Wilma and Hurricane Irene alone, prices declined across the board.

And that’s the effect we’re seeing from Hurricane Sandy.

You see, besides a few precautionary shutdowns during the actual storm, refining capacity in the Northeast pulled through unscathed.

And since October 15, the national average gasoline price has actually fallen nearly 6%.

Now, there’s no doubt that major gasoline delivery problems are happening in the areas most affected by the storm. But the true effect of this is an increase in the supply of gasoline. We’ll see exactly how high inventories get when the weekly Department of Energy data comes out tomorrow.

Oil prices have followed the same trend, falling to a three-month low right as Sandy made landfall. And bullish bets from oil traders fell to a five-month low.

Oil Prices and Sandy

That’s an especially precipitous decline when you consider that the time period includes a bullish jobs report, which should elevate prices.

Ultimately, traders who expected refinery outages to dampen demand started paring back bullish bets as the storm approached. And even though refiners weathered the storm, reduced demand should curb oil prices anyway.

Traders' Bullish Bets

Bottom line: It’s not like those who couldn’t buy gas during the storm will play catch-up now that it’s passed. So Hurricane Sandy effectively took the demand from hundreds of thousands of people for several days and removed it from the world’s consumption for the year.

As a result, the storm set a “new equilibrium” for prices, and any new projections should be adjusted to this level.

Now, I’m not saying the storm will have any real effect on the trajectory of energy prices. But the supply-demand equation has been altered until inventories get back to normal.

Ahead of the tape,

Matthew Weinschenk

Matthew Weinschenk